Q1 2021 ZTO Express (Cayman) Inc Earnings Call
[music].
Good day and welcome to the G. T O Express Inc. First quarter 2021 conference call.
All participants will be on listen only mode.
Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Can I ask a question you May press Star then 1 on the touched on phone so what's the.
Your question. Please press Star then 2.
And please note that today's event is being recorded.
I would now like to turn the conference coverage of his Sophie Li.
It does leave the floor is yours ma'am.
Thank you operator.
Hello, everyone and thank you for joining us today, the company's 3000 in the Investor Relations presentation were released earlier today and are available on the company's IR of upset.
Does the T O dot com.
On the call today from C. T O R of Mr. Mason Lai, Chairman and Chief Executive Officer enemies, Waking 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 them.
Answering your questions during the Q&A session that follows.
I remind you of that this call may contain forward looking statements made under the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
The statements are based on management's current expectations and the current market on operating conditions and relate to events that book not involve known or unknown risks uncertainties and other factors.
All of which are difficult to predict and of 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 Companys filings with the U S Securities and Exchange Commission.
The company does not undertake any obligation to update any forward looking statement of the result of new information future.
The events or otherwise, except as required under law.
It is now my pleasure to introduce Mr. Mason of Lai, Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English that's on.
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Please let me translate first.
Hello, everyone and thank you for joining us today in the first quarter of 2021 video for field services for 5 been impossible.
Through our volume 88, 5% year over year and exceeding the industry average growth rate by 35 percentage points.
CTO of market share expanded by 1.5 percentage points to 24%.
Further solidifying of our industry leadership.
Accelerating.
<unk>, we maintain service quality to be among the top ranked team.
For the first quarter CTO achieved of adjusted net profit of $782 million, which increased to 23, 1% year over year.
In the first quarter of the industry experienced rapid growth and the competitive dynamics continue to evolve.
In the environment of prolonged price decline.
The players of the index transformed divers of profit level line up well.
Positively growing as profit.
The video has to make further strides in improving trends of the efficiency optimizing network management and enhancing the lost milk price.
First the efficiency of the sorting and transportation platform for further improved.
The increase investment in cell phones transit facility in preparation for capacity demand increases in the future.
Capital expenditure in the first quarter was $2.28 billion.
We acquired that usage wise to suitable logistics Glenn.
Carried out up to 3 years for planning.
The modification and expansion aiming to develop smart comprehensive logistic service part.
There are over 10 projects under construction at this time.
For transportation without losing sight of the timeliness and cost control. We further optimize the balance between cell phone fleet and third party of vehicle usage to better leverage higher operating efficiency by all of our own vehicles.
With the help of technology and data analyzed with.
We continue to enhance existing Rob scheduling and adding new rocks that are more direct in accordance with demand to recalibrate passed the utilization.
For sorting operations.
We are continuing to improve coverage and the function of efficiency and automation the England.
Mental sorting center level of performance of pre sell mechanism. The detailed managed shift of spending and digitize the performance measures to enhance labor productivity.
And if waiting from capacity build out and the wider application of technology solutions.
On buying the sorting and the transportation cost for perhaps on the first quarter decrease of 5.2%.
The absence of benefit from EDC fee waiver policy that lawsuit from February to May of 2020.
Which skewed the year over year comparison.
Secondly networks, the ability with maintained which made it possible to promote the optimization of structure upgrade and the capacity of development.
By the end of the first quarter the number of outlets in the.
Home network swim in the stable.
Layering.
On 1 hand, we furthered our grade approach.
Of management's empowered.
Rectify and replace where appropriate.
On the other hand with focused on strengthening direct link to the last mile posts in the careers.
All of it Korea protection.
Further developed all of the processing capabilities.
We believe a stable network is the foundation for brands value resignation and the competitive strength Barbara.
Since 2 of networks that is built on Feraheme.
Furnace entrust the.
<unk> achieved the high performance in various categories of quality measures, including complaint rate.
The next score and overall public satisfaction ranking in the first quarter.
Certainly the last mile process development has been evaluated.
Advantage of our last mile presence became more apparent on the.
End of the first quarter, we owned or operated close to 70000 loss of muscle.
Far more than our competitors.
With the gradual shifting with eating habits.
Nearly half of the videos parcels were delivered other than to door.
Of which approximately 90% were accepted through.
Total.
Last milepost represents great possibilities of future development of all of it.
The other to handle the daily parcel volume of 100 million or more.
The last mile delivery cost containment, hence all lead to the viability and the pricing hover.
On 1 of our most important focuses.
In the first quarter, we delivered of debt off relatively satisfactory results.
Aside from consistent focus is on execution of our existing strategies for a reported express delivery operations.
We started to pay added attention to maximizing the utilization of Barbara equal resources.
As well as effective collaboration among the <unk> Z ecosystem of businesses.
So as to form comprehensive logistics service capabilities.
Our goal is to establish differentiated product and services to distinguish ourselves in the mind of Arbor customer and enhance the things that recognition and awareness of the video brand.
We firmly believe that competitive advantage as the only meaningful.
<unk> the level of cross comprehensive logistic capabilities.
Opportunities are beyond our imagination, such as more expensive service category.
Higher levels of.
<unk>, the operation and management.
And the content.
On the resource planning and utilization.
We all strive forward with stronger economy and higher confidence.
More solid work and the put the byram.
Together with our network partner, we will maintain positive momentum.
From a brighter future.
For trusting in the supporting on now please allow me to take us through detailed financial results.
Thank you chairman of line, Thank you Sophie and Hello to everyone on the call.
Of that go through our financials. Please note that unless specifically mentioned all numbers quoted are in RMB.
The changes refers to year over year comparison.
Detailed analysis of our financial performance, given the economics and cash flow are posted on our website and I'll go through some of the key highlights here.
In the first quarter, thanks to steady economic recovery and firm into the pension of our consistent strategies CTO growth passenger volume by 88, 5% to $4.5 billion.
Outperforming the industry average by 13.5 points on.
Our leading market share further expanded 1.5 points to 24%.
Total revenue increased 65, 3% to $6.5 billion.
Asps for the core express delivery business declined by 12, 4% or 18.
This is the least amount of drop compared to industry peers, yet we have achieved the most of market share gain.
The 18th price decline consisted of approximately 9 volume incentives.
Is to support on network partners to grow market share.
And maintain confidence.
As well as keep the net were stable at the same time.
There are 7 day.
Klein associated with the parcel weight drop.
Average weight per parcel declined about 10% to approximately 1 point of 4 kilo.
And then there's the <unk> decline.
Due to increase use of lower priced <unk>.
Bill yet it is more environmentally friendly because it's the single sheet.
The total cost of revenue increased 73, 6% to $5.4 billion.
Overall unit cost of revenue for the core express delivery business decreased 6.7% for <unk>.
Generally benefited from economies of scale and most specifically the unit transportation costs increased 3.6% or 2 things mainly.
Mainly due to the combined effects of increased use of more cost efficiently run self owned high capacity.
Thanks.
And the absence of favorable.
Total waiver policy the.
Lasted from February through May of last year.
Unit sorting cost declined by 17% or 7.
Because of higher level of automation.
Gross profit increased 33, 9% to $1.1 billion.
Gross profit margin rate decreased 4 points to 16, 9%, which resulted mainly from competitive lead ASP decline and per parcel weight decline, then partially offset by scale leverage and cost productivity gain.
SG&A, excluding share based compensation or SBC increased 25, 8% to $372 million, mainly due to increased salaries headquarter facility expenses and depreciation and amortization expense.
SG&A costs as a percentage of the revenue decreased 1.8 points to 5.8.
8%, given our lean corporate support structure.
Income from operations increased 71%.
Excluding SBC income from operations increased 38, 5% to $881 million or so.
<unk> margin rate declined 2.6 points, which is narrower than the gross margin decline because of the positive SG&A leverage and increased other operating income mainly the <unk>.
Super deduction and government subsidies.
Adjusted net income increased 23, 1% to 782 million net income margin rate declined 4.1 points to 12, 1%.
Operating cash flow increased 168, 3% to 477 million cash.
Capex increased 31, 3% to $2.3 billion as we focus more on building comprehensive logistics services capabilities as.
As we further strengthen our infrastructure in preparation for the increasing demand for the core express delivery businesses as well as resource planning for development of our ecosystem of <unk>.
The annual Capex would remain at a higher level for the whole year to be around 11% to $13 billion.
Turning to business outlook.
Based on current market conditions and operational.
Results we made.
Maintaining our annual volume guidance of 35% to 40% year over a year of growth.
Our annual parcel volume is estimated to be in the range of $22.95 billion to $23.8 billion.
Such estimates represent management's current and preliminary view and are subject to change.
This concludes our prepared remarks.
Operator, please open the line for questions. Thank you.
Yes ma'am.
We will now begin the question and answer session.
To ask a question of you May Press Star then 1 on the touch on film.
If they're using the speaker phone please pickup your handset before pressing the keys.
From the time my question has been the dress do like to withdraw your question. Please.
Star then 2.
As a courtesy we please ask that you limit yourself to 2 questions.
Again in the Star then 1 to ask a question at the time, we'll just pause momentarily to assemble our roster.
And the first question, we have will come from Thomas Chong of Jefferies.
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The business trend.
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Your thoughts on when you signed.
The man.
The market share.
Okay.
Thanks management for taking my questions and congratulations on the let me just on the search results.
Result, my question is about the competitive landscape given that the margin is getting more.
In terms of.
The price of oil.
Just wanted to get a sense about how we should think about the trend.
The ASP as well as our strength in.
Operational efficiencies and how we think about the <unk>.
The cost per parcel going forward and that's 1.
Management also share.
The pocket on the market share in the next I wanted to.
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Other than previous expectations. Thank you.
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Operator, please allow me to translate for chairman.
Thank you.
Thank you Thomas and in the.
Future 1 of 2 years.
The question is about the business trend in the direction as well so.
Asps and the cost per parcel, so I will translate as well as supplement answers for your questions.
First of all of our confidence remains on the gross profit range of Chinese economy, and as well as the industry growth for express delivery the.
The.
Next 1 to 2 years growth remained net.
The mid to high high to mid level of growth for the next 2 years for sure and this is Jay.
With high confidence that we have of provided outlook.
And with regards to the competition Express.
The delivery the essence of it in.
In terms of competition is about scale and efficiency in terms of providing better quality of services.
<unk> has been in the past consistently focusing on maintaining high level of quality of services.
Targeted profitability, while focusing on gaining market share.
And this will not change for the near term.
Infrastructure construction is very important the <unk>.
Strength of the network stability as well as the network partners Trust and confidence.
In the brand will ensure our strategies consistent execution.
As you have observed.
Those with scale with operational efficiency as.
As well as.
Better quality of services.
Are gaining market share are achieving balanced growth.
<unk> goal is to focus on our growth rate higher than the industry and our profit expansion.
Healthier.
Today, we look at our very stable network space.
With that on confidence remains for our steady growth on our market share.
Asps are.
We believe competition is still there as market dynamics continue to evolve.
Cost per parcel.
Is within.
Within our own control and we have implemented its eye on previously described many of initiatives for near term as well as longer term.
Productivity gain as volume continue to increase so we are confident in maintaining our goal to achieve from market share expansion as well as delivering healthy bottom line, while maintaining good quality of services to our consumers and customers.
<unk>.
Thank you.
Thank you.
And next we'll have Ronald Keung of Goldman Sachs.
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Thank you just wanted to ask on 2 questions first is on the competitive landscape again, just how do we see new entrants like G&P given that they have grown very significantly over the past year is this industry per.
Prone to just the players that have burned money through 2 to grow in scale and we are very confident with our leading position that you've been through a cash burning those that those would not impact those players will not impact all of very solid scale and efficiency on our number 1 position here.
And then a follow up on that is the recently that has been regulations on the equal pricing setting a floor on the pricing levels.
How do we see this trend of head win more compliments on the Staples Bruce local also pushed through more of these and how do we see these regulations could have any impact or benefit to our business. Thank you.
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Thank you Ronald final question.
We have consistently believed.
Believes that scale and efficiency and cost.
Are the key competitive from.
The factors to ensure sustainability or continued growth.
There are 4.
Specific segment.
Or a package to travel from end to end.
Pick up transit sorting delivery.
The infrastructure.
As well as scale and cost efficiency is.
The determining factor for competitive edge.
JMP, Inc.
Trade into the market with significant.
Capital and yes. It is indeed, a cash burning model as of now.
Temporary of it it does.
Created impact to the entire industry.
Yeah.
However, we want to point out that if you look into the past in the industry growth the <unk>.
Smaller ones or those without its own sustain.
Sustained capabilities are all gradually exited all of gradually exited the scene.
Future competition.
The.
Starting today or starting the.
The near past has been.
The scale and cost efficiency in that area.
With the top players about 8 of them representing over.
Over 80% of the market.
The volume are in the range of 30 million to 60 million per day for the.
Those that are running at 30 million per day there.
Their profitability is very much under pressure already.
So.
For our motto that largely rely on third party.
Resources, where cost and efficiency are.
Less under their own control the.
This model of believe is not sustained.
So our assessment is the in the longer term.
You must combine capital that is deployed towards infrastructure establishment or development.
That could allow.
Model to continue to sustain continued to grow.
And on your second question.
Then the.
The recent <unk>.
Policies issued by the government.
Our view is that is from career operators.
On providing services that are below cost.
Prolonged period.
The revenue of all of the players will be largely.
Suppressed.
Hard to guarantee quality of services.
Currently there are over $4 million per year staff nationwide.
And with a addition.
Of about approximately 200000 each year.
When government carries out focus and attention.
To providing the market to restore healthy competition.
We are well can coming that and we support that.
The action.
It will not only ensure healthy competition the more importantly, as we always have been focusing on in insuring.
The last mile.
Careers for the.
Those who are small entrepreneurs.
To achieve healthy and high quality of growth.
It's the regulation issued recently also.
Specifically prohibits price that is below cost.
And then that helps net.
Throw of the gap between all the different players, especially during those competitive regions, where production output or more concentrated.
So this will allow all of the enterprises or businesses to focus more on service quality.
Network stability and infrastructure development, Inc.
Short term near term price driven market share gains.
In addition.
If we may add the policy also specifically.
Addressed ecommerce platforms.
Some of the actions of practices that are of restricting.
4 in designation of specific courier operators.
Prohibiting monopolized.
Operations the.
These are all very positive so.
The ads to our further confidence in a improving healthy competitive environment for us to compete.
For the future.
Thank you so much by the anthem.
And next we have Tien Ho of Th capital.
On gains on that.
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Thank you hakan on the way.
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The first question is related to what does.
Those of the freelancer deliver guys.
There are some issues regarding their insurance and Whatsapp and what is the company's the thoughts regard in this regard.
That's number 1 number.
Number 2.
What's the all the OCA for the.
Per parcel revenue in the next several quarters from a current cash.
Competition point of view on.
The third question is related to the new business development, what is the time the sensitive.
The parcels and the 1 is on cold chain logistics in the 2 fronts of what is the.
Current developments of what is on the book.
For the for the rest of the year. Thank you Lindsay line.
Yeah.
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The.
When you sort of say about half of the 2 in situ credit do you any sort of.
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Some of the other Solta and training.
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The Shanghai boss on the suite.
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Jonathan on women change at Genie in the Hong Kong core debt to the.
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Tissue.
Thank you thanks, Anthony on for John.
Thank you and let me on right.
First question regarding the free events or.
Yeah.
Fresh delivery personality of its a very critical part of our business.
Because of the CTO is a.
The network partner model.
Presented its inherent challenges to ensure.
The.
Careers.
Right and also interests are well protected in the past CTO has been working hard on.
Implementing many of the initiatives to ensure that part of the.
In the equation.
For example, we rolled out direct link of direct accounting.
Approach to ensure timely payment to our current years.
Recently, we have.
At the headquarter level funded a nationwide.
The policy.
<unk> policy to ensure of $24.7 protection of our.
Personnel of.
Careers for any of the unexpected Inc.
And that could harm them.
Either during work or outside of work.
We have in the past.
Wrote out policies to establish standardized pricing for our pickup and delivery.
To make sure of our courier could have the opportunity to receive market price is.
On picking up packages.
Where we continue to focus on these areas.
We are also in response to government.
Focus as well as policies to ensuring freelancer.
<unk> of the society.
To continue to have a healthy work environment as well as fair allocation of.
On the payment as well as their basic rights for example of social.
The rights for the 2 medical to insurance.
In all of these are a.
On.
The process that involves not only us at the headquarter, but also our network partners.
And especially during <unk>.
Fierce competition. These work becomes even more important and requires more attention and resources.
And we will continue to work on those areas.
And your second question relating to.
Essentially competition.
The price per parcel of what is the trend.
While we cannot specifically identify or point out the time when the price may resume so we are able to.
Provide our view on understanding when.
From a qualitative standpoint.
The turning point may occur.
As we said in the earlier conversation the.
<unk> advantage lies within the scale the call.
Cost efficiency and the quality of services of the entire network.
The market dynamics has been evolving and has been continually concentrating on.
While with the large.
Demand in the Chinese Inc.
Express delivery industry, there's not a possibility for 1 of 2 players to serve the entire market, but we do believe the concentration will continue to take place and the price competition will ease off as the market share.
Leadership becomes more apparent in other words, the bigger will get even bigger and the smaller of the weaker ones will be still there. However, the growth will be tapering off.
And when that time comes.
The price will then have an opportunity to resume the normal normalcy and perhaps start to coming back in accordance with CPI or normal price adjustments.
Yeah.
Earlier the government also we mentioned that the government also have interjected and provided attention in insured.
The discouragement on low price competition and that is a added confidence to us.
Looking towards the near <unk>.
End of the tunnel type of situation as we can see.
The third question relating to our cash.
Time definite products.
We believe competition in the future is not only with or no longer we should say with core express delivery business.
It has to be relying on comprehensive synergetic competitiveness across the supply chain of logistics services.
Goal is to become the world class, leading comprehensive logistics service providers and we have since 2016.
Started to build our comprehensive capabilities.
Specifically with regards to our time definite products.
And coaching operations.
This year.
In April we have opened up.
I'm definite products.
In Shanghai.
John Hi.
In coffee with.
With standardized pricing as well as time definite.
Programs.
Second quarter of cold chain business.
We'll establish operations across 5 major cities and we have already raised our network of franchise.
Franchisees in the area.
Our.
The fleet program even without.
A single airplane has been.
Successful in consolidating.
Demand and matching the best effectively price efficiently price.
Resources or airfreight.
In the all of these.
Our our effort surrounding the brand.
Element.
Making sure specific definite.
Patients.
As well as differentiated product understanding and recognition are.
Being provided to our consumers.
Further internationally speaking we have.
Deployed resource planning.
Including large warehouses or including warehouses and.
Different sizes of packages.
Right.
As well.
In preparing for expansion.
Nationally in the future.
As Chairman said earlier, we will focus on in the next 3 to 5 years in developing differentiated products.
In altering.
The geos.
Nation or <unk> value.
So that it could be differently viewed.
Then the rest of the tone that currently.
And there are many initiatives underway right now.
Thank you.
Thank you <unk>.
Well at this time of will conclude our question and answer session I would like to turn the conference call back over to MS. Sophie Li for any closing remarks ma'am.
No.
Thank you everyone for joining me on the call on behalf of the entire CTO management team, we'd like to thank you for your interest and your participation today.
Require any further information or have any interest in visiting us in China. Please let us know thank you.
For joining us today.
Thank you, Matt, but also to the rest of the management team for your time today again. The conference call has now concluded at this time you may disconnect. Your lines. Thank you take care of never Great day, everyone.
Yes.
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