Q2 2020 ZTO Express (Cayman) Inc Earnings Call
Good day, and welcome to let's say two or expressed second quarter financial results Twentytwenty conference call and with cost.
After today's presentation.
<unk> opportunity to ask questions.
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Just to read the Safe Harbor. Please go ahead Sophie.
Thank you operator.
Everyone. Thanks for joining us today. The company is resolved Investor Relations Redefinition were released earlier today.
I hope that I heard Dalbeattie O'donnell.
The call today's long BTL, RBC, Jamaica, why chairman and Chief Executive Officer.
I mean weakening yen Chief financial Officer.
July will give a brief overview of the company business operation highlights.
Yes, well go through the financial guidance, they both be available to answer your questions during each night.
[music].
I remind you that this call may contain forward looking statements made 30 seat hopper.
Where do you like to gauge had we Werent Act of 90 95.
Statements are based on managements current expectations and occurring market off reaching completion.
Relate.
Well no one Laura.
Service each other factors.
All of which are difficult to predict.
Which are beyond the company controlled which make up the call me after without a woman or achievements to differ materially from though in the forward looking statement.
Further information regarding that and other with certainty.
That's true.
The company.
[laughter] already in Exchange Commission.
A couple not undertake any obligation to wait.
Any forward.
The result of.
<unk> future.
Or otherwise except as required under law.
It is not now my pleasure to introduce Mr. myself by mid July withdrew his prepared remarks.
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And your lifestyle Oh, please allow me to translate.
Hello to everyone and thank you for joining up with todays earnings call.
Hey, Colby I didn't commission further stabilize China experienced a healthy we bombed economic activities and a strong bally domestic consumption during the second quarter over 2020.
As such trying to extract the LIBOR industry generated five point, well see anything no matter, how goes and grew 36.7%.
Well I referred to level what are these bodies.
No 17.
The industry leader you achieved they totaled 4.6 billion hospitals.
Quarter.
Representing 27.9, 10 year over year growth and we extended our leading markets year to 21.5.
Meanwhile, we were able to maintain an improvement trend on quality of services and customer satisfaction, while achieving I body broke.
During the second quarter, we maintained our key strategy, we just took salaries Bonnie.
Let me start really I'm, continuing spending over market share.
Price competition intensified.
Necessarily modifications to our network policy to boost the level of incentives and the show a collaboration between pick up until the we always see Alan.
In addition, we granted low or zero interest alone to selected network partner through the deals and then to provide cash flowing.
I mean, they competitive pressure was driven by our burden that were partners to these challenges and look to the future.
Fiber network remained stable.
Meanwhile, we furthered our effort to improve cost to productivity.
Subsequent to the first quarter investment the broadening roughly another 2100 additional high capacity vehicle.
Opened up 500, new line haul rod.
We reduced the use of third party logistics services.
And water.
I'm pleased to use of automation equipment, and accounting youre auction the waste a lot of to be less dependent on labor.
Initiated on improving timeliness, such as process breakdown and separate monitoring enhance the certainty and stability.
As a result ever combined this 40 and transportation costs are Paso declined by 71%.
The continuous improvement you never operating efficiency Denver, the impact of price completion.
Despite intense competition beat here was able to balance among quality of services.
This year and earning.
As a combined to resolve the strong assumptions, even volume growth and a caustic vision, which helped to offset the impact would probably be decline.
CISA adjusted net income of 1.1, if I see I mean, which increased to 5.6 person.
We believe in the past two girls prospects of the China expressed some deeper we industry. We also recognize that would be cohen's market dynamics weird that leading game prompt delivery companies are relatively close this year and competition com applicable.
Must focus on what we can do.
And why not.
Lead in order to achieve.
Uh huh.
Within the next two to three year.
We see these pass on body was likely to a top over 300.
And then we must maintain a long term vision.
Yes.
Worked diligently to with him comprehensive revenue.
Oh lean forward, we will continue to focus on strengthening infrastructure across operating higher network.
<unk> operations.
The following.
Brent developing not for infrastructure to be capable of handling over a 100 million baby body in your future.
What about increasing investments you don't.
He and provide financing to support our network partners will also increase your processing capability.
We will gradually.
Our structure through the leering Endo streamlining would you need frequency aggregation exportation.
Definitely improved operational efficiencies to be would you call. In addition to skill that bridge.
Enhance resource planning and dispatch Oh, I called transportation and raised the level of Digitization and automation what sortation.
And the advanced worth doing smart technology called logistic far.
Certainly.
They strong foundation for multi channel last mile expressed well business model.
Further the man sender front line career fee structure.
Okay, and then I'll jump Inovio initiated on one hand, and celebrate device development a lot from awful.
Nor does it cost advantage and shorten the distance between product and <unk>.
Last but not at least that will lead to design and the implementation of nobody type product.
Such I've got just pickup arguments that does it for me and coaching services.
Darren Peter to words costumers.
Visualize the need for book, you logistic requirements, what specialty good and create differentiated product line and relevant processing capability.
We ran awareness develop consumer insights <unk>, who logistically here.
A copy endeavors whole ease while transforming called me leading crops. So before we called me too and he Cooladvantage comprehensive logistic service provider.
And to accomplish such technology and data analytics.
No.
Apart from deliberately we've gone through all day the operation.
Robert business manager.
Earnings from My chart.
The process.
And associated result, honor to identify problem and to make necessary decisions accordingly.
Policy of services market share and profitability would never ever strategic.
The thing rolls up Barbara corn crop business, well established draw them all.
Two tenths forms where world leading comprehensive logistic service provider.
And the development our ecosystem is never passage way to achieve our permission.
We'd have raised the guidance for full year Packer wanting to reach between.
I want to to 17 billion.
Our goal, we will endeavor wholeheartedly to achieve.
And then upper scale today, it would not be difficult to hang short term coffee.
However, we chose to focus on sustainability in the balance interest all arbor something to win for long term weekly.
We firmly believe that the China [laughter] deliberate industry will continue to progress. While we are confident you have right, but what do you see opportunity in a week this marathon likely.
Perhaps the biggest challenges as well as a minus the strength lies with.
Are we in our partner can stay true to our intention.
I have ever come and go and momentum faith and confidence and the LIBOR solid execution every day.
With that being that that's turns harbin theatrical kindle thinks goals Robert finish.
Thank you chairman lie and thank you Sophie.
Hello to everyone on a call.
Is that go through our financial results. Please not that unless specifically noted all numbers quoted are in RMB and percentages changes first two year over year comparison.
Detailed analysis of our financial performance unit economics, and cash flow are posted on our website.
And I'll highlight some of the key points here.
Benefited from a strong rebound in E commerce, driven consumption opted to covert 19 situation has been see if they can make contained within China CTO delivered a strong volume growth in the second quarter.
Parcel volume grew 47.9% to 4.6 billion and our market share expanded by 1.6 0.2 reached 21.5%.
Total revenues increased by 18% to 6.4 billion.
Core expressed their degree businesses.
The S.P. declined by 34 cents or 20.9%, what a quarter better than industry peers.
It included 20 cents volume incentives as added support to our network partners in order to maintain.
And protect market share.
As well as keeping out networks staple.
Two cents.
Related to increased adoption of single she digital wave here.
And two cents decline due to parse the weight drop.
Gross profit of 1.8 billion, which was relatively flat from last year.
Gross profit margin decreased 5.2, 27.6% as a combined result of volume increased unit price decline.
As previously stated.
Cost productivity gain.
You need transportation costs declined 20.4% or 12 cents.
To 43 cents, primarily due to increased number of self owned high capacity trailer trucks.
The decrease in either price and national toll free policy.
That ended up nearly towards the end of May also contributed to cost decreases.
Your next sorting costs declined 11.1% to four cents.
Or four cents to 27 cents as a greater number of automated Saudi equipment, we're placing is allowing a higher proportion oh parse those to be processed automatically instead of manually.
It's DNA increased by 2.3%.
Excluding share based compensation as DNA as a percentage of total revenue decreased by 2.5, 0.24, 0.9% demonstrating positive operating leverage or more efficient corporate structure.
Income from operations, excluding SBC increased by 9.5%.
And associated margin declined two point, which is narrow.
Narrower than the gross profit margin decline.
Because of its genie leverage and increased other operating income mainly consisted of government subsidies and tax rebate.
Operating cash flow was.
1.252 billion for <unk> second quarter, compared with 1.993, if again in the same period last year.
The decrease resulted mainly from the increase in financing provided to our network partners in higher Pee paid you and told cost given by larger self owned fleet.
Capex for the quarter was 2.25 billion.
1.44, getting higher than the same period last year as we increased investment such as adding over 2100 high capacity vehicles.
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 Corbett 19 price competition and the company prioritized go to achieve accelerated mark is checking while maintaining our target level of earnings we raised our twentytwenty.
Annual parcel volume projection to be into 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 Twentytwenty you'd be in the range of 4.8 billion to 5.2 billion.
Benching, EUR, 1.7% to 9.3% decrease year over year.
These estimate represent management's current and preliminary view, we are subject to king.
This concludes our prepared remarks.
Operator, please open the lines for questions. Thank you.
Thank you.
I'll begin a Christian and sufficient.
Good question my per stop and then one touch trying to fine.
So to speak aside please go ahead.
Personally in the case.
Any time you question has been addressed and you would like to withdraw your question. Please press Star then too.
Your first question comes from <unk> with Citi. Please go ahead.
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Oh two questions. The first question is regarding the second core Turkey, a big nice well actually know taste.
Sargent acceleration the key volume growth.
Corridor, which also needs to the Ti costs increased a lot in second quarter, what the leases had if he is.
Ill ask intentionally to do the K business in second quarter, Oh, it's due to the pandemic stimulation, which helped more a lot penetration of our economy.
On the second question is regarding the guidance.
May not bad the young going to provide them all break it down into the entirety of P. assumption the cost reduction assumption out into second half and also want to touch on the tension becomes a dead and action we can't see the first half I'll present strategy was executed a barbell until some external disruption.
Oh boy, it's supposed to see about good opportunity to okay. Here's a landscape I want to adapt to yours, but not being to see more complex competition not only from toned down two years, but also known to adopt theaters are we still want this to our first half press strategy what the recent <unk>.
This year.
[noise]. Thank you for your question, let me address the Okay. I question, then no I turned over to cheer my life for it to price strategy.
Okay increase yes. This quarter, we did see surge indicate and this is partly proactive and partly but not proactive.
The decline in the gross margin is in line with.
Margin activity emerging movement with thanks, Brett core business, so other than Kay.
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Okay CHEMOSAT first of all.
Oh strategy remains Oh, we will focus on prioritizing on expanding our market share and increased our lead.
And we will.
Further leverage our advantage and.
To maintain the discipline.
What we did see in the second quarter at a price decline, the but more severely as expected.
We always believe.
To ensure our network partners maintaining their level of profitability and also our careers achieve higher pay a in the market and our team maintain confidence or these are important things for us to uphold.
Short term gangs or easily.
A pain, 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.
Then our competitor or competitive peers network partners.
And then we also will insistent will be insisting upon.
Making profit.
On all aspects throughout the whole process up a particular package. So we don't.
Bring in ineffective.
Volumes as we stated before.
With all the thinking if I may supplement that we still see into third quarter, the price competition persisted and to be prepared for.
Implementing the strategies that channel I, just described we lowered our profit target.
To be ready.
And also it is a <unk>.
It is a level it maintains a level comparable to our last years level for the last three quarters. If you notice that the first quarter Koby 19 impact was severe to the business, but the last three quarters looking forward we are.
Confident in achieving the targeted level profit and further accelerate the growth on our market share.
If I further me 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.
So those 3 billion EUR 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 easily advantage. So that we can gain more mark.
This year and the pricing power will follow.
Thank you see in one number now that doesn't factor XI blame me girl homing in on the T. do trubridge on them in country.
Okay.
Sure.
Michael on the cost reduction guidance for the next.
Few commentary.
We have yes I. Thank you for your question, we have always been focusing on gaining productivity as volumes increase is we will naturally achieve their 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, a de layering and also streamlining our overall network structure will allow us reduce cost improve efficiency and timing timeliness.
Oh, Oh product so the outlook for our productivity gain on transportation and assorting aren't going to be expected.
Yes.
Thank you next question comes from.
With Goldman Sachs. Please go ahead.
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Yes.
Okay. So let me translate.
Oh first of all we believe.
The express filigree industry has still a long way to go it is a marathon.
The concentration of the market share will continue to.
The market she 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.
Hour.
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 just say that our businesses is more preferred compare to our other competitive peers.
In the meantime.
To anticipate volume increases we are preparing a on me 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 and our partners through financing support to help them in that in facilities as well as the automation.
The overall.
Effort and developing differentiated products.
As we mentioned before including.
I'm definite products or individualized.
On demand pickup and delivery as well as coaching all these as we mentioned will help us.
<unk> expand our leadership.
And ensure our last mile network partners as well as our careers achieved the highest profitability and the overall capability as well as stability.
Looking to the future.
As you asked Ronald.
<unk> reach.
25% price competition around.
Around Twentytwenty, we are going to reach 25% price competition may not be necessary.
As Jim said.
Even without price competition or market share will continue to expand because all of our core capability of our better managed.
And the higher operational efficiencies as well as the entire network with a better quality of earnings.
So with that we believe again, our focus is on the future.
You.
Two.
Achieve.
In the one of the items if I may I go back to is that chairman described.
Further what it means to be layer.
In the past.
We win a we won and we surpassed our competitors through connection or better efficiency connecting our trend transit Super centers.
And gradually throughout the past and going forward we.
Developed capabilities to connect.
Good.
Origination sorting center to destination.
Oh that.
Going forward, we would further supplement the capability of our network.
Routing connecting between the origination outlets and destination outlet.
That is what we said reducing.
[laughter] frequency of sortation and that will further expand our capability, so that we could bringing more volume process, it better and deliver it.
Faster.
And better.
Great. Thank you. Thank you.
Thank you once again, if you wish to ask a question. Please press Star then one.
Your next question comes from Hong Food.
With J.P.J. I Securities. Please go ahead.
[noise] play sleds, all yes, or no Oh, well, Germany, Yeah, Oh gosh I found backward look I don't know how we'll know why are you more doesn't really only when she or he wanted what she loves to show amounting to about taking Modelled has only been home has all should that.
They should they all know country chembio they'll be about again.
Well what are you going out into why you want on the books, how she though I tell you bought in general when she Oh, you know like I don't know juncture more blunder told us that.
Well you got to be sure. Your line is dual arch and I'm wondering if the dollar check on promotions, how that how much Israel I know a war so I'm going to I kinda, while we'll then take on more doubled from a pencil on them and the whole, Jamie, but I want to being down a little more or less than five to show.
They go which is oh, though so our issue.
Oh not was please I wouldn't see I'm not I'm sure. Some already about your last mile laterals why it's about short from won all the precaution Shelbourne defined national solutions in the second call her audience reach and jobs and the second I'll change about long term national price differential.
Yes in recent years last now he has taken more and more proportioning dollar total cost and also due for last mouse emotions very allowed so I wasn't one or in the future is they the possible to have different price they want different rationale solutions Oh. Thank you.
[noise] <unk>.
Okay. Okay. Thank you for your question.
So far at the last mile or investment and development Ah that you'll have been that's benefiting us in handling a greater amano last mile delivery as well as reducing calls for our network partners again, the cost of delivery yeah.
A couple more mild belongs to our network partners.
And the volume is somewhere between 40% to 45%.
Okay last mile package is now being handled by non door to door delivery.
And you talked about potential differentiation or.
The last mile cost differentiation here are some of the Todd.
Last mile is a key.
He segment of our business in terms of the four segments, so tiny and pay the pick up did a very oh.
During the two and the delivery cost going forward with volume increase you would anticipate increase if without any of the alternative methods.
The chaz drop off Bach or a 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 on our partners to invest in the last mile religion, because last mile resources ours are scarce.
And to ensure our presence there will help on that were partners to secure the lowest cost of delivery in the future.
No another second layer, which probably is more related to your question is that because of our last mile presence and all connectivity with consumers with customers. Our careers are able to achieve a better connection and in enhance.
Bring about potential commercial opportunities and that is part of for what we are currently a investing researching and design and implementation. So that we could help our network partners to one east the initial investment pressure I when they first start the output.
Last night post operation and into a allowing them to gradually ramp up there to the detection.
Most show operations.
I hope that answers your question.
Oh gosh handle.
Thank you. Your next question is a follow up question from.
Citi. Please go ahead.
Yeah, that's only and go Oh, Hi, Olympiad, you've got one thing down like.
What's the Joe's business school Kigali fetal alcohol dose you beat.
Oh wage reductions and sometimes you can catch it and goods out yet.
So she goes out go no go drinking sometimes say they Johnson.
She told no no, but I do want I don't think that.
Social woman, who gets what I wish I mean, do you know when I see that especially on the trial do Johnson Julian passing Magellan Ah. That's just the should generate dozens of them quickly just.
<unk>.
Oh. So my question is regarding a down payment to deliver guys caused Nigel lies on absolute size that I think T O actually paid a much better today, our deliver guys compared with peers to ensure the stability and that work actually know tisdale what's appropriate.
Oh, the lack of that direct payment today, let's say to a lesser amount anyway, guys I could you repeat share more details on this pro Glenn.
Targeted programs and Hollywood feedback so far.
Yeah, so yeah, so it in.
Great de show good wouldn't it used to CISA do see out so I didn't MTM. She you will see what's I didn't MPMP she knows how to show these hey.
I think all the woman Michel button and she is a year billions home two years, so chance high.
Okay. So it's got to some volatility it she says the Chintan I also thought so champion peptide show, what I asked shops and cheap when they are then may you get so good clarity Shocker Hudson childhood.
Yeah, that's on the tone until they wouldn't be holding gain or too. So do you Wanna woman billionaire so do well know him again, let's all bad situation being.
I'd be shocked it's a shame quite D.
Yeah, we answered here she was a good job told me.
Well then.
Todd English how soon you. So they've got good you will know you you said, there's only been field to check in Japan.
Suddenly centrally gotten so the tissue you wait hassle gets its got to also a minute angle Chang Hall, so do they want minutes. So.
Cool events, which isn't a decoupling.
No.
So going into the later I will make that sort of how it's starting to we didn't Chuck handy to soak shoot pinch out to me.
So to dissipate holding me she has done it took a.
On the gene to enable me to quit teams all I'd say in your face.
Is the design thinking behind this some motto of fun current directing it directly connecting with our Courier is that's such a it's part of our de layering a initiatives.
As we mentioned before but if I made that we have started to develop the standard pickup and delivery fee schedule.
In 2018.
And and when we are able to make it transparent.
Tween, what we pay to the network partners and what they pay to the couriers because we think the.
The business the platform the transit into sortation is strong, but most importantly, the pack it needs to be delivered and that the touch point with all consumers. So therefore, all courier holds a very important key facing customer so to help them develop.
From a employee E or maybe a.
Just a little entrepreneur to truly a motivated to work for their own because they are able to achieve more.
Market, driven as well as a affair pay that is pass through to them through the network partners.
And so far what we have seen is that our network partners responded quite well as will add to this model or in in the fact in fact that they believe their careers or more stable I'm 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 all the parties involved so far around.
40% of our network partners.
Have signed up and started to a implement this model in our goal is to achieve at least 50%, but by looking at the current a trend or current responses. We believe we would may exceed that 50% a coverage go.
So that we said before.
Mhm.
Thank you your next question.
Question from Hong Foods hours, and with JP JMP Securities.
Please go ahead.
No no go they how high are you going to go a lot. The question just why all nothing with some concern about Joe sure injured, although one yeah deep or their whole Kalona argued for those of us about how good don't always ongoing but she's a door I do I see Kirby don't bother don't all bargainer.
Well I will now go into too much.
I'll turn it on but I'm not going out into those are ones that she brought you to hold on the unless you had your budget go downstream from the high Gunter Gen. Looking for council, yet [laughter] I hope they are the ones you know for sure and yes, you should think about culture, Although I'm sure. You'll know once you become border I'm not a bowsher charter bogus warmed up.
It's about culture, that's your budget the highest John John Dan. So you're are you see any other show no. It's almost all of sudden hagerty a true wage hike when you're I hear that so you know to go or no high from Chicago Domzalski. This about hydrogen call for sure. So I know you're right I wonder what we should all of them under being a very cool.
Oh, they would change or answered on the older. So who does he talked about culture.
Demo shall not just about hydrogen do you can be found guy Deuschle I'll work and I know one you are my question. So dogs the capital expenditure on the first one is that so we noted that the capital expenditure in the second ordering krish, though as I'm all that why handle on it sounds like her son.
And well continue in the second half of the or.
The second question is about says they are kind of capital expenditure on our network I nurse Oh, they have like Salinger hour now what ive nurse or has the same way one voice ourselves. So they have a wrong that makes on Cook Osha all capital expenditure Oh hour.
So myself I know I won't call I'm not thank you.
[noise] [noise] think will play a question indeed as you I stated this quarter the past second quarter, we acquired and placed in service a lot of the increment trucks and vehicles that we.
Invested is around 2100 2200, so and this is a one time, but yet we believe investment in the infrastructure is one of our key strategies to build capacity in anticipation of the high volume by incoming volume.
The overall budget for Capex spending is around 7 billion for this year, we think that is somewhere close to what we had previously talked about.
To our 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 four aspects needs to be a coordinated 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 line to be installed by our and our partners and so far we've already.
Seeing the network partners invested over 50 of that so towards the high season, we think that investment pace will pick up even further.
Some of our larger.
Network partners are also invest in land and this is a long term investment, which again demonstrated their belief and ER and the confidence in the future of the business together with us.
Oh, yes or no.
[laughter].
Thank you.
It's a conference for today.
I would like to turn the conference back to the company for any closing remarks.
Oh, Thanks again for everyone on joining us what today's call a any further questions. We owe welcome and we're looking forward to.
Thanks.
To to talk with you soon.
[music].