Q4 2020 ZTO Express (Cayman) Inc Earnings Call
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Hello, and welcome to the Z T O Express conference call to announce fourth quarter and fiscal year, 2020 financial results all participants will be in a listen only mode.
You need assistance. Please signal a conference specialist by pressing the stocky followed by zero.
After todays presentation, there will be and opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Sophie Li Director of Investor Relations with Mei sung Lai director and CEO and Hawaii Pinion and CFO. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us today, the company's results and the Investor Relations presentation were released earlier today and are available on the company's IR website at IR <unk> video and Dot com.
On the call today from you or Mr. Mesa Lai.
Chairman and the Chief Executive Officer, and with Me Yang Chief Financial Officer, Mr. Lai will give a brief overview of the company and business operations and highlights followed by MS. Yan, who will go through the financials and guidance and mobile.
And just to 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 on Liberty Safe Harbor provisions of the private Securities Litigation Reform Act of 90 95.
These statements are based on management's current expectations and current market and operating income.
And they relate to events that involve known or unknown risks uncertainties and other factors.
And of which are difficult to predict and 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 and are forward looking statements.
Further information regarding this and other risks uncertainties and factors is included in the company's filings with the U S Securities and Exchange Commission income.
Company does not undertake any obligation to offload 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. Mason Lai, Mr. Lai will read through his prepared remarks in their entirety and Chinese before I translate for him and English.
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Thank you Lisa and Mark please.
Let me translate first.
Everyone and thank you for joining us today.
A year of tiny tiny representing another milestone development.
Development.
We maintained our overall cost on that.
And as section and improve.
Parcel volume by 48, 3% over last year.
17 billion and extending our number one market share to $20 four and.
Plenty Tani and was also and extra ordinary year, we remained towards harbor shared success philosophy.
And leveraging on our extensive coverage and our brand recognition, leading scale and the capacity something of his plate and improving operational efficiency and Takeda and collaborative network partners.
Maintain top brand and service quality, while growing volume rapidly.
And Mr. Hart below a pandemic frequent changes in industry dynamics and a fierce price competition.
Recorded.
For a 59 billion of adjusted net profit demonstrating a highly differentiate on quality of earnings from here.
Two our broker market here.
CTO and consistent strategy to accelerated parcel volume expectation and expand market share, while balancing that with quality and our profitability has been cooling and back to.
First we're focused on building <unk> capabilities.
One hand, we acquired a relatively larger tract of land for constructing comprehensive Mark logistic Park.
Weighted operations, such as and warehouses.
And our logistic fulfillment.
While enhancing the level of automation and utilization, we are defining and stacks that are acute vocal quality maintained yet varied operational flow.
We have increased the proportion of self on fleet, including high capacitance touch and Archrock and improved the ending and seen a ratio.
And also better optimize the use of third party logistics to supplement our own fleet.
On the other hand, we continue to enhance the development of <unk> technology platform.
In addition to the dramatic on upgrades of our existing operating margin such as Samsung Samsung Galaxy and the Bailey.
We achieved the new breakthroughs on areas such as user interface.
And that streamlining new product innovation and the ecosystem value proposition.
With Congress and the capacity development and refine the process management and economies of scale and a favorable and PC policy during the pandemic.
Combined sorting and transportation costs per parcel decreased by 14, 3% year over year.
Secondly, we continue to expense development on pickup and delivery and the strength and our last mile capacity and service quality.
And focusing on scale and the efficiency of transit and sorting centers.
On one hand by providing financing technology support and operate.
And on the call would help our network partners, who reached the capacity bottleneck or face the challenges and managerial capability.
And given the strength of the group, we are able to modify subsidy policies frequently and appropriately to help coping with highly competitive and are consistently changing market condition.
On the other hand from both with Beckman and the negative growth or wheat quality performances.
We deployed a great base to a pension approach, which then quartermaster on to low fully address problems and implement improvements and.
Third we are accelerating and last mile development.
And that beginning in 2018 details last mile presence has been increasingly and home.
And of 2020, we have more than.
68000, and last mile posts, leading the industry last mile delivery matters other than door to door that shift and lost muscle.
Not only effectively reduced handling load and cost pressure.
But also provided moving forefront and customer acquisition.
Meanwhile, the proactive trial and adaptation of the express plus model provided valuable experience and supply chain approach based on Iot mindset, thereby strengthening and connectiveness with our last mile consumers.
And at the commencement of the 15 five year plan 2021 and will also be and important year for CTO to build brand value and the rest of the nation.
And and upgrade it services and the products and.
Stablish collaborative ecosystem.
We're all carrying forward our recurrent initiative.
And we'll focus on the following aspect.
First and.
Ensure sustainable growth, we shall take on corporate social responsibility, and including operating and environmental friendly way and helping farmers and alleviating poverty.
Our efforts are underway, such as new screen packaging upgrades vehicles that run on renewable energy winter visit to villages and the rural workshop.
All for logistics solutions to help revitalizing blue economy, and provide a baby care for Grasberg Walker.
Secondly, we are optimistic on the growth prospect of the express delivery industry in China, our top priorities are to solidify our leading position in parcel volume and further expand our market share.
With our increased investments in infrastructure not only on expansion of our core express delivery business and the improvement of our returns of efficiency and.
And also for organic yet rapidly developing equal advantages.
We're on task equal importance to assist and reforming arbor networks on their management.
To ensure a cohesive match of capabilities between pickup delivery and the transit operations.
Price competition is likely to remain or even become more intense as they draw closer to it and we will take responsive and flexible approach to policymaking to in fact active control our risks and opportunities.
We will accelerate the expansion of our last mile Lockbox and oppose the facility or express packages.
And with our increasing parcel volume, we aim to enhance our pickup delivery capability and and manage costs.
To express plus model with opening two all wheel drive towards these opportunity under the emerging commerce development and to establish stronger connection with our customer and we lost volume.
And the hearing to our principle of shared success.
Seek to inspire and Enzo ever loyal and network partners to invest in the last mile opportunities and create long term value debt are weak.
Last but not released.
And we'll optimize our organizational structure and upgrade talent strategies.
We have implemented and accountability. This term abbvie probing show and sorting center level, where rights and responsibilities are assigned to the front liners.
We are developing future leaders through multiple cash line.
With the survival of the fittest approach to performance evaluation and backed by innovative technology tools and we seek to establish a culture of management that relies on digitized process managing performance of people to dive result.
During the Chinese new year holidays CTO implemented.
On interrupted survey explanation you too.
With more than 97% of our direct and network partners and the tens of thousands of drivers operators and carriers remains on their post handling 140 million parcels for customers across the nation.
Detailed blue we're seeing anywhere.
We delivered not only daily necessities, but also <unk> and a warm to our customers.
Our brand building where growth deeper with our very differentiated product and services, allowing our customers to truly experience the difference and inform you make a recommendation at heart.
The recent launch of our integrated coaching and time definite service network.
<unk> average five year plan and brand building strategy.
We believe that average ecological deployment and the collaborative development will enable us to maximize the utilization of scarce resources, we put that to provide depreciated and their personalized services and products to our customers.
And Craig and compounded return for our partners and investors.
As preventative measures became normalized for the COVID-19, pandemic more and a more consumer and category, including named brand.
And the ablation and greater online and offline presence.
Online categories.
And the Internet shoppers demographic, our spending and shifting more diverse economy region.
From check tomorrow, dispersing or a fragmented digital as a sales channel express.
Celebrate industry has become more and more concentrated and the leading group of players are also polarizing into stronger and weaker pack.
Almost a quarter of 2020 one has passed.
And express delivery industry experienced unprecedented growth so far into the year.
Let's eto, we focus more on the Marathoners seminar.
We are merely 18 years old while no one can predict precisely how the future will unfold.
And we cant however think clarity of what we want and when was that.
And we have to rely on and what direction and the path we shall take.
Journey, Inc. Beneath our feet and we are on our way.
Thank you all for your trust and support.
Now please.
Allow me to take it through video and financial results.
Thank you chairman Thank you Sophie.
Hello to everyone on the call is that go through our financials no debt unless specifically mentioned on numbers quoted are in RMB and <unk>.
<unk> changes refer to year over year.
Detailed analysis of our financial performance.
And economics and cash flow are posted on our website.
And here I will go through some of the key highlights.
Driven by a strong consumption demand post pandemic and I'll sound execution of strategies, we exceeded the high end of our volume target range by growing parcel volume 43%.
To over 17 billion.
So for the year.
The $4 9 billion incremental parse those in 2020 is industry number one and is greater than the total parcel volume we achieved for the entire year of 2016.
Our leading market share further expanded by one three points to 24%.
Net revenue increased 26% to $8 3 billion for fourth quarter and increased 14% to $25 2 billion for the year.
Annually S. P for the core express delivery business declined by 21% for Q4 and declined by 22% and for the year, which is moderate compared with industry peers.
The price decline resulted from one volume incentives to support our net where partners to grow market share, while maintaining confidence and keeping the network staple.
<unk> increased use of lower priced single sheet digital way bills and three parcel weight drop of 8% to one point on five kilo 40 year or 1.06 kilo for the quarter.
Total cost of revenue increased 31, 9% and for Q4.
And increased 25, 1% for the year.
Unit cost of revenue for the core business.
Decreased by 12, 1% for Q4 and 11, 8% for the year.
Unit transportation costs declined by 15, 7% for fourth quarter and declined by 17% for the year, primarily due to increased use of self owned high capacity trailer trucks.
We also benefited from the favorable Toro waiver policy from mid February to early May and.
And also the decline in diesel prices.
Unit sorting cost decreased by 24% for Q4, and nine 4% for the year as a result of higher and level of automation and improved economy of scale.
Gross profit decreased six 9% for Q4 and 11, 8% for the year.
Gross margin.
Gross profit margin decreased six six points to 22, 5% for Q4 and decreased six eight points to 23, 1% for the year, which resulted mainly from competition.
Competition led ASP declined partially offset by cost productivity gain.
SG&A, excluding SBC increased nine 5% to 418 million and for Q4 and increased 13, 8% to $1 4 billion 40 years, mainly due to increased salaries and headquarter facility expenses and depreciation and amortization expenses.
SG&A cost as a percentage of revenue remained low at five 1% for Q4 and five 6% for the year on corporate cost structure remained stable.
Income from operations, excluding SBC decreased by 13, 9% for Q4 and 13, 2% for the year.
Associated and margin declined seven six points from Q4, and six two points for the year, which is narrower than the gross margin.
The gross profit margin declined because of positive SG&A leverage and increased other operating income, namely Super deduction government subsidies and tax rebates.
Due to the depreciation of the onshore U S dollar denominated bank deposits against RMB The company incurred a foreign currency exchange loss of 82 million for Q4 and $127 million 40 year.
Operating cash flow was 2 billion for Q4, and 5 billion 40 year decreasing seven nine.
And nine 7% and 21, 5% respectively.
Capex increased by 68, 9% and for Q4 and by 76, 2% for the year as we secured larger tracks of land for developing comprehensive logistics facilities.
Just more self owned vehicles and installed more automated equipment.
As we further strengthen our infrastructure to support accelerated volume growth for the core express business.
As well as resource planning and development of our ecosystem, our annual Capex plan would remain at a similar or slightly higher level for 2020.
The company announced a 25% U S dollar dividend for the year for shareholders on record as of April eight 2021, representing a 30% dividend payout ratio similar to previous years.
Turning to our business outlook.
As COVID-19 has been largely contained and China, we're confident to achieve a prioritized go to accelerate market share gain considering.
Considering the current market conditions the company expects the parcel volume of 2021 to be in the range of 23 billion to $23 8 billion, representing a 35% to 40% year over year and increase.
We are not providing earnings guidance.
Given careful considerations for the level of uncertainties and the competitive dynamics in the marketplace.
More importantly, volume growth and accelerating market share gains.
Weighs much higher as we continue to maintain high level of quality of services.
And achieve appropriate level of earnings.
Accordingly relative to our competitive peers.
Our track record.
And as provided clear evidence that our earnings quality is among the top of the industry.
The above estimates represented.
Management's current preliminary view and are subject to change.
This concludes our prepared remarks on.
Operator, please open the line for questions. Thank you.
Yeah.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone sign if youre using and speak a fine. Please pickup your handset before pressing the keys to withdraw your question. Please press star and two we ask that participants limit themselves.
Up to two questions per person.
Your first question comes from Thomas Chong from Jefferies. Please go ahead.
Hi, good morning, Thanks from any comment about taking my questions and congratulations on a solid set of results.
And my question is about the competitive landscape.
Try and pick trended one.
Should we expect the landscape to be more.
And <unk> com.
<unk> two last year and on that front, how should we think about the ESP as well as the cost per parcel trend.
In coming quarters, and my second question is.
He is about the.
Various initiative that we may potentially pursue in public.
Any thoughts.
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Thank you for your question and let me translate for chairman.
And as you can see debt we.
We have.
And experienced a very price competitive dynamic and dynamic year.
But as we go through the process and the law.
Lower tier players are pretty much out of the picture and even so the top group of with concentrated players with scale are also showing polarized dynamics, where the bigger ones bigger and more profitable.
On a smaller ones and not growing and also and not making money.
And making losses.
So everyone's.
Positioning in the market among the top tier players are very different.
We believe the Chinese market, especially the express delivery market will continue to.
Our growth steadily and buy and official estimate by the year 2025, the total volume or near double.
Current level and that would mean that scale and infrastructure construction is crucial to our sustained growth.
This year, we invested $9 2 billion.
In infrastructure and.
And it is consistent to our longer term initiatives our strategy to build strong capacity.
And also capability.
The Chairman also mentioned that not only we are developing our own platform scale and operational efficiency. We are also helping from network partners through financing.
<unk> management.
And consulting to help them develop their capability of managing their businesses.
And also breakthrough somewhat the potential bottlenecks in their facility and capacity now with all these investment while the market continue to grow we think.
The dynamics would be much more clear and within a reasonable number of a period of time.
And our leading position.
We'll likely.
And and make it much more.
And stable for the competitive landscape.
Express delivery business reliant on scale.
And when you mentioned and when you ask the cost per per parcel of weather.
Or the trend.
In the near future or as we are currently working on.
The three.
Network or three layers of our network approach will further.
Provide cost efficiency for us and Gilles.
Specifically in the past as we used the past hour.
Competitors.
Key advantage is within our better connection and.
And more efficient connectivity between our sorting hubs.
And today as we develop volume.
The origination.
Network and the origination outlets are able to pass the origination.
Bypass origination sorting hubs and go directly to the destination sorting hubs and where you're seeing the number of sorting sortation.
Times of Sortation has declined.
And second layer of and network.
He is referring to the origination outlet.
To the.
And the destination.
Sorting center and yet at the same time, we are also seeing more and more direct routes are opening up.
Between the origination outlets and the destination outlets.
With this more direct more streamlined.
Process.
Cost efficient efficiencies.
It will be further demonstrated and also our consumers.
Experience will be improved because product packages will be traveling at a much faster speed, so timeliness will improve.
With regards to the group buying certainly as.
As we mentioned the digital commerce has been evolving.
The competition for express delivery will become and two and and not only just the platform capacity and capability.
We've invested in building.
Smart logistic comprehensive logistic service parks, which will include.
L T O cold chain warehouse.
Not only because they each are synergistically related.
But also the resource utilization could maximize value and provide differentiated product to our consumers or customers.
Group community buying.
Intersects with our last mile.
Presence, which is leading in and industry.
So we think there is great opportunity for us to capture.
The value.
Throughout this new approach of commerce on.
Last mile capability.
Is not only in the post.
In terms of number but also from a penetration and coverage perspective.
He is.
More advantaged compared to all the others for example, the county coverage is over 92% and our initiatives to further bring.
And about our presence and the rural area into the villages.
And going to further provide access to any of these new coming new forms of commerce, because at the and the consumers are there.
Thank you for your question.
Yeah.
Thank you.
Okay.
Thank you.
Our next question comes from Tien House from Th capital. Please go ahead.
Yeah.
And that's all number and then suite.
And what kind of woman and she is on some of the salary you'll eat and yeah.
Yeah.
All in our unions that she's counselled, whether they'd be the wechat.
And patchy Matthew could you elaborate what they'd show up and they should come and they go through.
Yeah.
That's all you could just yes this hunting from.
And he goes have you took from that.
Tom Kindle, daughter gets hung up and then it goes from opponents outdoor lights on.
And is it.
Well the T L you'll leave and yeah.
And do a few times and Joan.
And so on the wholesale Honda fit on.
And do you go on.
So it sounds unusual items that you keep your puncture Sharma from them deal with that and.
And she can sell them.
So question one from the market share point of view I see later, but that shouldn't team than previous quarters. So what how do we maintain our market share in 2021, what are some specific actions they feel its going to take them.
That's the first one second is regarding the computation.
Very hard to make to maintain the possibility well, we'll have to deal with that.
Rice computation, so what's her from a specific actions or strategies.
It's going to take us to balance the two are very contrasted.
Contested issues and that's my question. Thank you.
Yeah.
To tissue and even if you win.
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Yeah.
Yeah, so sure thoughts on that.
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Hi, This is Ed so should the center.
When we use and a junior them and there's something and at our minimum will be on condition.
And so you son, San and mobile.
Tissue.
Thank you Tim from your question.
And yes, we did notice the slight decline from quarter to quarter, and we think that the key reason is the.
The eight to 10 point some improvements in market share by JMP and it is.
And I and creating a dilutive impact on everybody.
And but we think that is not a sustainable long term trend from our perspective.
Delivery is still a volume and scale and operating efficiency and again, where we have continually invested in our infrastructure our scale leverage and has some provided significant.
And damage to our balanced approach and not only growing volume and expanding market share while maintaining quality of services, but also achieving.
High level of earnings.
And we believe our focus is on the longer term and.
And in a infrastructure investment this year we are.
And we have achieved a historical high of $9 2 billion and it will continue to increase for the next year a stable network is the second key important factors for sustained long term growth.
The.
Network partners.
Operating within a highly competitive marketplace.
And they are still investing in their facilities. They are also.
Working with us and our.
Development of our network.
Network changes, where we are streamlining we are de layering and they're also working with us and it's apparent our network partners are much more confident.
In our approach and in our business to continue to lead.
So our network is the most stable and and thirdly, specifically speaking when we.
Issue network policies is also its also unlike any other.
It's <unk>.
Transparent.
Fair.
And it is also.
And a highly competitive dynamic much more in sync with the market condition in other words, we are asking our designing our policy to be competitive.
Compared to all the other competitors in the marketplace.
Are not any better off our worst off yet because of our operational efficiency, we are able to leave more room for our network partners.
The longer term growth of Chinese express delivery industry.
For the near term is when we as we see around 15% to 20% growth annually and.
And <unk> goal is to achieve.
And 10 percentage points higher than the industry growth with that pace. We believe in 2021, our volume growth will lead us to achieve 22% at least of the market share.
And we're still on our way to achieve a higher market share and our goals set for 2020 two is around 25%.
And then flipping thank you and.
Mr Lai.
Yeah.
Thank you. Your next question comes from Ronald Keung from Goldman Sachs. Please go ahead.
Thank you.
There lies on the ankle.
And went out with you on by you guys go through on the Armenia, and Knowhow, our Ddos and Dino J E. T C to Jim here Raj on me and he says about.
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Roger Goodell grew Oh come on things on hydro.
Do you lift the hood liquids or with home piece are dong.
And our union and you'll see that we were already to do on coal and beat and she wants at a weighted timeshare and general and come out with the airports the debt.
We do so and that's a good day after we do them behind us ladies and kind of who are you gonna do on.
Would it be on home and do that.
Put on no one's asked on the hook and quick so are you doing.
Tom Byrne pleasure.
Mobile backhaul.
<unk>, who do a woman that their growth algorithm and Ccs.
And I hope you are about to one woman.
Yeah.
Tom.
It's hard to not go through with that woman.
And do you try and do them and there's a cyclical element L. T O elements associate them and do it all of them now.
Women will either go into the Ot element of genre and hopeful cortisol.
People are stickier than the other way you ship.
And we'll be all.
That's where it goes from a will.
And that's cross segment that you see.
Hard to find them and from home that yourself, and Philippe and I don't see.
Why aren't we.
We've seen the unit cost in 2020, where there was a big day.
Big decline and costs, particularly there was toffee exemptions and a second quarter EBIT rebates for insurance exceptions.
And so if you look into 2020, one with these cost push and we expect our players to pass through these costs.
If the declines actually be less and this year versus 2020.
And then my second question would be you talked about and logistics parks and kind of combining express MTO cold chain and warehouse and.
And with a more comprehensive solution for our customers.
And I see that Oh T O is actually on associate that we own on a.
High teens stake so we have plans to increase those big day, what's the plan for the hotel business. Thank you.
Okay.
Okay, Let me and <unk>.
Answered the first part of the question.
The fourth quarter ASP decline is still largely related to the market competitive and.
And in environment and.
We have seen debt in the fourth quarter, given we've given a much more incentives.
For our network partners.
For the full for the fourth quarter and 25%.
And in a decrease of a total of 36 and debt decreased four.
Related to the net where incentives was 25 cents and.
And so the the cost side of the equation certainly what you've mentioned and we did experience.
Policy benefit in the first quarter of this year because of the toll road waiver and also there are some benefit from the.
Oil price decline and.
But that is still compare to our operational cost efficiency gains and.
We believe the cost competitiveness with continue to.
Continue to be had.
Going forward.
Aside from any of the policies or benefits.
And in the marketplace.
So going forward, we think a S. P. The trend is still very much related to the market condition.
When we did say that the competitive the competition has been going on for awhile and each of the players profitability and also their ability to grow.
Which largely dependent on how and where they are and that where partners are investing if not investing and then the end to end competitiveness will not be and continue to be intact. So the clear leaders are those who are able to maintain stable and network.
Invest in infrastructure and have strong interest structure as well as further cost and scale efficiency gains.
And for the the second part of the question the LTR business and all our other ecosystem.
Development.
Sure.
In a way very much organically in sync. So we developed our LPR business and then our cloud warehouse business and today, we've decided that it's time for us to invest more in smart logistic.
Operational parks because of there in terms of the synergies that are being able to carry out by all our businesses L. T O business being one of the earlier exercises on earlier trials of our approach to a new adjacent business and.
And it's been doing quite well and its been among the top five now with a very short period of time, only a three or four and number of years, it's attained its market position.
And we think that it will lead our approach of a synergistic development.
Our our ecosystem businesses.
Thank you.
No.
Thank you and that does conclude our time for questions I'll now hand, the conference back over for closing remarks.
Thank you operator, Inc.
Closing on behalf of the entire <unk> management team, we would like to thank you for your interest and participation on today's call. If you require any further information or have any interest in visiting us and China. Please let us know thank you for joining us today.
Okay.
Thank you and that does conclude our conference for today. Thank you for participating you may now disconnect.
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