Q2 2021 ZTO Express (Cayman) Inc Earnings Call
Okay.
Welcome to the G. T O report second quarter 2021.
<unk> financial results conference call.
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I would now like to turn the conference over to Sophie Li Director of capital markets. Please go ahead.
Thank you operator.
Hello, everyone and thank you for joining us today, the company's without an Investor relations presentation were released earlier today.
On the company's IR website.
Hum.
On the call today from C L.
Mr. Nathan <unk>, Chairman and Chief Executive Officer, and me Sleeping Yan Chief Financial Officer, Mr. Lai will give a brief overview of the company's business operations and highlights followed by Mr. Yang Jong.
Judy for initial guidance.
We'll both be available to you.
During the Q&A session that follows.
I remind you that this call may constitute forward.
We're looking statements made under the Safe Harbor provisions of the private Securities Litigation Reform Act of 90.95.
Such statements are based on management's current expectations and current market and operating operations.
And we later.
That involved more although I guess I'll present, these and other factors.
All of which are difficult to predict and many of which are beyond company's control, which may cause the company's actual results performance or achievements to differ materially from those in the forward.
Looking thing.
Further information regarding this and other risks uncertainties and factors is included in the company's filings with U S Securities and Exchange Commission.
The company does not undertake any obligation to actually update 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 MS. Germany's July mid July.
Prepared remarks prior to <unk>.
In Chinese.
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Gotcha.
Thank you Elisa.
Please allow me to translate.
Hello, everyone and thank you for joining us today.
In the first half of 2021.
Yeah.
Yeah.
Got it.
Thank you management.
Strategy is balanced.
This policy.
Okay.
Okay.
If pricing and avoiding unnecessary lossmaking volume.
<unk> achieved five eight they're impossible.
Adjusted net income of one.
Yeah.
Oh Wow our customers.
Core breakfast tacos appear.
And that work implementing total process.
The 72 hour time.
When it stood.
Philadelphia comes out later.
Network stability and network partners confidence and the willingness to invest in long term growth or by balance sheet growth.
Timothy franchise.
Tomorrow.
It is even more.
Critical at times of diminishing profit or even losses, even prolong depressed.
Yeah sure success culture, and long term practice are highly aligned with the recent regulatory interventions aimed to ensure social stability.
We have always relied.
Operational efficiencies deliver best in class quality of services and the profitability, while consistently empowering our partners or E C.
This is precisely the reason why consecutively for the past several years. This year was able to deliver increasing proportion of aggregate net profit range.
Moving from 25% to as high as 80% with approximately 25.
Sure.
Oh well.
Cable network.
Policy is supportive of health.
Sensible pricing and being well adopted we help solidify <unk> competitive advantage and allow us to pull further away from the competition.
<unk>.
V. T are always focused on being our best itself setting our sights on the future and the strengthening of our core competencies, including infrastructure.
We have made further progress on the network upgrade stockpile expansion and brand building during the second quarter.
First we continue to implement initiatives to support.
Or are we form ever partner operation.
A top down and wafer agreed approach.
Just transparency and fairness.
The trust and confidence to improve network.
Yeah.
So typically for example, the closed or absorbed those Ali that we're no longer too.
We identified all lived with well with potential or important for strategic placements.
Placements and established a goal of capacity expansion.
With added financing support he didn't know about agnostic.
Pricing optimization legal and financial Advisory services.
And technology upgrades.
In short in capacity and capabilities for Pizza hut.
<unk> kept the.
Transit and sorting pension.
In addition.
With the regulatory attention to the rise in Egypt.
In the front line, where increased participation of direct payments of last mile delivery fee.
Sure.
Extended coverage for career schools accidental and employer.
Sure.
Let's set up a 100 million from a career here.
Well they start level measurements matrix that football Caruso.
Proactive measures have not only tangibly improved sensor.
These days and achievement across grassroots community.
It also provided added smallpox formal Paul lots of Wells Fargo.
Well.
Secondly, we see development of last mile to a strategic level for CTO as well.
I've been hearing so this year that philosophy, we designed the partnership structure to promote these deeper integration.
We should know and the ownership level with our network partner.
Aiming at building a last mile network with wide and deep coverage of urban and rural area, well service standards and a consistent images are.
At the end of second quarter, we had over 17000 last mouthful without increasing lead over our peers.
Location can cater to where they were.
Uh huh.
S Express delivery network become less layered in a more stream.
Last month, our carry weight.
B that are beyond our imagination.
Yeah.
Well, it's celebrating the expansion look like muscle.
Dwarf amortization and a more varied from myself.
That is added in neighborhood services rich content.
Policy for battery experiences.
I have a chance and the value proposition for these store owners are a creature.
Third we actively and then new products extend it.
There is a limitation by collaboration.
Question.
However, logistics.
At this time.
Try to establish differentiation brand awareness and values.
According to the objective with back in Europe.
As the year moves on activity with emerging from this platform, particularly in areas of reverse logistics.
And at the same service categories covered fresh produce.
Why in theory and specialty care.
Lorne one stop logistics service offering to deliver a comprehensive that's true.
Angel.
At present time adapting the service has been made available nearly 100 cities.
With determinable right.
Advanced alerts and other customized for humans guarantees.
This new initiative are generally well received by our customers and tasked groups.
The coaching business under a bigger ecosystem have lunch time definite services across its newly formed nationwide network. We are reaching our operation teams are being quickly assembled.
We are further advancing and deploying resources to lay the foundation for a future capable of universal inclusive in the well integrated multi product and services.
We believe the express delivery industrial well maintained at medium to high speed as well that's the.
Two to three years.
The industrial landscape has clearly been debating not only bodies or quantity, but also in policy such as over operational strength and their profitability.
But the very nature of express delivery.
The partner network model requires long term accumulation of capabilities, including her at that Steve.
Steve no harm and that works well here English.
Capabilities in all four segments of the patient transportation and delivery must've continuously improve in the state and think.
Moreover, as volume continues to grow these structural thing networks must also evolve and become more agile act so as to continue to generate positive productivity, while maximizing scale advantage.
With the approaching baby bond.
Hundreds of millions or even 500 million parcel.
T O M maintained its consistent and effective strategy I suitable expansion of its transit and sorting platform reduce overall frequency of transit and rely on Digitization and a data driven decision, making to enhance connectivity and efficiency.
Well, we pay close attention to the appropriate and in time expansion of our network partners capacity.
Last mile Network development and CS.
ASP plus commerce opportunities.
We will steadily develop harbor suppose the fear and build competitive advantages with comprehensive product and services that are different.
Our brand value and the recognition.
Now that's asked let me see and she'll take us through results of our financial performance.
Thank you Sophie Thank you Jim and.
Hello to everyone on the call is that go through our financials. Please note that unless specifically mentioned all numbers quoted are in RMB and percentage changes referred to year over year comparison.
Tailed analysis of our financial performance unit economics, and cash flow are posted on our website and I will go through some of the key points here.
In the second quarter by executing a consistent strategy, we achieved profitable volume growth in group parcel volume by 25, 6% to 5.8 billion, while attaining one 3 billion adjusted net income a leading market share was 21% for the quarter.
Total revenue increased 14, 4% to $7.3 billion.
E S. P for our core express delivery business declined five 9% or eight cents with approximately four cents related to volume incentives and another four cents from parcel weight drop.
Average weight per parcel declined 8% to approximately 0.92 kilo.
The cost of revenue increased 22% to $5.7 billion.
Overall unit cost of revenue for the core express delivery business increased one 7% or one cent.
More specifically.
Line haul transportation costs per parcel increased 10, 2% to RMB 48 cents.
Unit sorting costs increased $2 four per cent or one cent.
Normalized for one time benefits such as E T SEC toll road fee waivers.
Where oil prices and social where for exemption we benefited last year during the COVID-19 outbreak.
Bind transportation and sorting cost per parcel generated positive productivity again over last year still.
Gross profit decreased five 4% to one 7 billion.
Gross profit margin rate decreased 4.8 points to 22.8% as a combined result of price decline increased costs against there's nowhere base due to one time benefits during last year's COVID-19 outbreak.
SG&A increased 26, 1% to 394 million from increases of compensation and benefits.
Office expenditures depreciation and write offs of obsolete assets.
Income from operations decreased 11, 6% to $1.5 billion.
Associated margin rate declined 5.8 points to 19, 9%, mainly driven by that four eight points decrease in gross margin.
Adjusted net income decreased 12, 5% to $1.3 billion adjust.
Adjusted net income margin declined 5.3 points to 17.4%.
Operating cash flow increased 50, 354.3% to 1.9 billion.
Capex outlays totaled $2.2 billion as.
As we further strengthen our infrastructure in preparation of increasing demand for our core express business.
As well as resource planning for development of our ecosystem, our annual cash flow or Capex is expected to be around nine to 10 billion.
Turning to business outlook.
Based on the current market and operating conditions. The company maintains its previously stated annual guidance of 35% to 40% increase year over year for the volume.
Our annual parcel volume is estimated to be in the range of $22.95 billion to $23.8 billion.
These estimates represent our current and preliminary view and is subject to change.
This concludes our prepared remarks.
Operator, please open the lines for questions. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speaker phone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Again, please limit yourself to two questions each.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Ronald Keung with Goldman Sachs. Please go ahead.
Thank you Sophie.
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He made a boatload of trauma to.
Two the football club, even fool you sure you don't element or the June with Sabine element about unit cost high number so I don't want to push off on the order trends you should target you're going to grow mid to mid to high single digit the only issue. There you go.
Costa ego.
Now I always find yourself I think.
Management I've got two questions first is on them.
The competitive landscape and how we think about the second half.
As our full year parcel volume guidance would imply probably some with some 27% to 35% implied parcel growth was for the second half so that would be faster than the second quarter. So I just want to hear as we balance profitability and growth, which we did very well in the second quarter as we currently expect.
Based on the guidance some faster growth in the second half would that be overall industry acceleration that we're expecting or would that be any fine.
Fine tuning of our strategies and pricing and market share gains in the second half.
And then my second question would be on our cost productivity agenda and talked about the positive productivity. Once we take out the one off factors. So on a unit cost perspective, particularly as we head into the second half how do we see the room to further cut on all unit cost, particularly on sorting and trucking. Thank you.
Yeah.
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So the.
Dan in for Matt <unk>.
Uh Huh Patrick.
Okay.
I will translate the answer to the first question first and then I'll answer the second question.
Oh strategy maintain and expectation for the second quarter second half of the year's growth is.
Stable and maintaining or perhaps there's a chance of below second quarter growth and as we continue to.
Seize opportunities and rely on our own capability to gain market share. We wanted to point out point out to you that fourth quarter typically in the past the market share.
This is below the second and the third quarter. This is largely driven by seasonality.
And the second question.
We.
After excluding the one time effect.
For the COVID-19 benefits.
Second quarter's per parcel cost is positively are better than the productivity gain is still there.
Well, we expect the second half as we rise as we achieve a higher level of volume because of the seasonality and reaching closer to our optimal production level the cost productivity will still be there and our current estimate is around.
5% to 6% gain her personal year over year.
Thank you Ronald.
Great. Thank you.
The next question comes from Eric Zhang.
With Macquarie. Please go ahead.
I think you mentioned.
Hello. This is Ellie Macquarie. So I have a question regarding the Oh.
Separate the management comments in the opening remark on the card.
Potential to opening up more channels towards the emerging E. Commerce channel. So I would assume that includes a lot of the short form video channels. So could you provide some color in terms of channel mix for the parcel volume and for these emerging channels.
Would it be more negative impact or a positive towards the overall ASP you try it.
They might have lower weight overall, so that's the one question in a second just quickly on embracing a Brexit, but this way over here. So we've seen you know governments shouldn't bright line things.
Price control.
Kind of last mile.
We could we think we are now kind of an inflection point, where the overall price war should be reaching more of a stabilizing stage so from.
From now on our second half we should be seeing you know at least on the competition side there should be continued.
Now what came in at like a place that we're the ones who actually have fun.
Anything you want to deal with.
That was helped by a woman who should go towards that.
You don't go Crazy.
I'm watching.
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More tenants I'm actually equal I think that sounds like the government kind of wage not doing each of us have a handle on it when I think of S. P D, but that won't ship bunkering.
Yes.
Yeah.
And he thanks for your question the first question.
We have been expand.
Banding, our penetration into all these new ecommerce channels and typically what happens is as we take on these new parcel activities. We are usually represented the largest share.
Some as high as 25% and above now this entirety, a is still our attempt to enrich our product mix or to improve our product mix. Because we are typically traditionally they rely more on the traditional e-commerce with the new.
<unk>.
And innovation taking place in the market place we are key in making these connections with new up and coming channels and the results have been very positive now still I would say the total volume with respect to our core express.
Ms Kate it more towards E. Commerce is still not large but the trend is very promising.
The second part of the question regulatory intervention is indeed, helping the stabilization of the entire express delivery.
Operations price bottom is that because the sufferings typically is more felt at the last.
The totem pole of the chain I E.
Last route level of operators, and particularly still including careers.
So what we believe the price stabilization is a continued trend and again as we mentioned this is very consistent with <unk> long term.
Practice in supporting our network partners and in some cases, we may even provide more support because we set our sights on a longer term deal.
Up and downs in the marketplace shakes the confidence and also the hope for the future, but yet at the same time, but we believe it is critical for us to maintain confidence across the network with our network partners would be willing to invest so with.
Our strong.
Corporate earnings we are willing to provide more support then the market practice at.
At the same time maintaining the.
Profitability quality of services as well as market share gains.
Okay.
Mhm years Yamana.
Yeah.
Yeah.
And was there a follow up.
Ali.
Or does that answered you well, thank you and congrats.
Very much for the answer.
Thank you. Thank you.
The next question comes from Lin Chen with JP Morgan.
Please go ahead.
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Company to grow our insurance I'm quantity medical science.
Oh, we're finding children all once you Oh I have two questions. So the first question is that Oh, we noticed a little the company's market share decline a little bit.
Second quarter part of the price declines that we had a modest.
I'm talking about players. So my question is whether it is a short term a change of strategy or a more like a longer term strategy and our company is still committed to the 25% market share pockets your 'twenty 'twenty two.
And then my second question is about our social security payments.
I understand it's our employees didn't sign the contract with a third party agents. So I would like to know how many employees have fun with this.
Kind of contracts.
And since it.
Since the government encourage that.
Appointment of employees. So has the company has any plan.
To transfer to its employees into permanent head count and what would be the what would be the impact on our cost.
Thank you.
Yeah.
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Okay.
Allow me to transfer.
Oh consistent strategy is to achieve targeted tropical maintain high quality of services, while growing volume and market share.
The temporarily decline in market share for the quarter resulted from our emphasis on profitability without taking unnecessary losses.
And also it's under the positive influence of the regulatory into mentioned.
So that we can allow our network partners to be less burdened by price competition maintained stable operations and restore confidence for their future.
Part of our owned and intensified price competition in recent years has threatened the very survival of outlet operators and careers.
They're legitimate rights and interests are in their seats, because they're often suffer the most.
Raising attention to social stability the relevant regulatory agencies has issued several policies and procedures. This year intended to promote fairness and healthy growth.
Industry.
And we have said earlier that this has been consistent with our long term.
Cheered success philosophy as well as practice.
GTO is regarded as the industry leader to uphold government policy and helped maintaining overall stability.
So not only because of our shared success philosophy and long term practice is to achieve win win with our network partner, but also because we strive to achieve.
Optimal balance among quantity of services volume growth and profitability.
We're being more prudent.
Rice pricing.
Pricing practice and choose to let go lossmaking volume during the quarter.
So our market share retreated slightly.
Again, as chairman mentioned earlier it it takes real competitive edge to win.
And the express delivery business relies largely on scale efficiency.
So we believe with a stabled.
Market operation and competition routine returning to sensibility, our competitive advantage will become even more apparent.
We all have.
Noticed and the clear division and the market dynamics.
So looking forward into a environment where growth is stable.
And also the market dynamic shifts could very well take place in time.
We are still hopeful and we will continue to strive to achieve our goal in volume growth and.
And market share gains.
The second question relating to the social welfare.
And indeed our.
100% compliance is being.
Closely.
Monitored as well as uphold.
Including.
The outsourced employees outsourced Labor force there social welfare are well established and we welcome them.
Practical.
Solutions or planning on even better support the grassroot.
Communities to protect their rights and interest going forward.
Okay.
It does that.
Answer your question or was there a follow up.
Mr. Chen.
I'm good. Thank you very much loved one of your engine. Thank you.
You didn't hear the question.
Sure It comes from James <unk> with Bloomberg.
Please go ahead.
Okay.
Hi, Thank God, Oh, Oh did a year ago shell shocked when do you think Oh wait Yonkers, Scott Jones, who you'll sit in Chengdu like Oh go totally under Jason I'll take the pool, but you won't see a familiar and younger unless there's equal when she oh tioga.
N T Oh jeez I can wait out let's say two to go into this.
Well, maybe I'll translate my question and my question is regarding the E. S. P dropped there wasn't a expense mentioned of which all sense was due to the lower <unk>.
Parcel weight per parcel and I'd like to know what is the reason whether this trend would not continue.
Hey, Jim.
Great. Thank you for your question that the four cents decline relating to the parcel weight and we have actually observed that trained and the reason being that the e-commerce.
Itself is also evolving where particularly also because of the COVID-19 people learn to shop online and they learned to shop more sporadically.
Ever there is a a demand or need for a good purchase they would go online and they will do their shopping.
So on one hand, we believe the efficiency and also the timeliness of express delivery business provided and supported that shopping behavior. So we believe that decline is a trend and it's a natural trend now I think.
The concern might be this is the way I'm I'm offering more explanation to your question concerned maybe that as the way continued to decline the price will continue to drop a actually we do have a minimum wage requirements and oh, so anything below that would be a flat rate and as we continue to have.
There've, how the weight changes I believe the industry in order to cover its fundamental cost, which is there either heavier or lighter, but we'll make the necessary changes to the pricing structure.
Hope that answers your question.
Yeah. Thank you Patricia.
Thank you.
The next question comes from Paresh Jain with HSBC. Please go ahead.
Yes.
Thank you so much for taking my question and.
I was just wondering if you can talk about your Capex guidance Redwood, we expect the second half capex to be deployed and also if we can talk about the prospect of non express businesses, where do you see the most opportunity whether it's a cross border or weather.
For the full freight forwarding.
And would you approach to organic growth the strategy or the focus would be to grow through acquisitions. Thank you.
Okay.
Thank you Paresh for your question.
The first part of the year we.
Deployed 2.2 billion.
And our plan for the whole year on a cash outlay basis is nine to 10 billion about.
About 70% of the DS are towards acquisition of language rights and development of our infrastructure. Some of which are designed for comprehensive logistics service capabilities and I shall be the similar proportion going forward for the second half of the.
A year and as you know that land use rights and development of facilities take cycles and there are pipelines that are visible to us. So the ninth point at nine to 10 billion is what we are currently estimating.
The second part of that.
Question relates to our development of the ecosystem.
So we you mentioned the cross border as well as co chain that we have talked about in our prepared remarks as well as those are already.
Operation for several years, including the I'll call. It warehouse business the freight forwarding the freight a L. T O business all of these are in.
<unk> it.
Its totality coordinating and also a dressing up and coming and evolving demand in the marketplace now and if you compare to the western countries, where large scale and and also our professional.
Logistics service providers, they are very geared towards specialty services and of course, each year because of our express scale are unprecedented and also in China market only it has a better chance of evolving into specialized.
Logistics services and that is why we have plan to our entire ecosystem development to beat that.
The special requirements are for for example temperature control needed rates.
Cross border as they continue to do.
They are all a part of our overall strategy. The timing is most important for example, our international activities. While we do have growth developing in the we have delivery network developing in the South East Asia Pacific countries are they.
Air structure are also limited because of their size and because of their local e-commerce conditions.
Across the board going into Africa going into Europe. We are currently in a stage of planning resources. So it is a very staged approach not necessarily immediately spending and investment across the board because again, our philosophy and our practice in the past is prudent.
And profit seeking.
So it's inevitable. The planning is there all of the ecosystems will need to be working together the clar warehouse business. It provides one solution where in house processing and also delivery pick up are connected with our L. T O business with.
Our express business and now we are connecting coaching business to it as well. So it is from one focal point in adjacency combined holistic solution to be provided to our customers.
Perfect that's very clear in the Shannon if I can if I can squeeze one more question.
And I you have addressed that in thoughts and in earlier questions. When we talk about the competition and consolidation.
And then there are moving parts, where some of the provinces are trying to create the floor right to ensure that the system is not dispensed out but.
But does it mean that.
Some of the.
Rather subscale player.
Mi the consolidation be delayed as a result of it because the stress on their their cash flow may not be events. As a result on other way to think about it is that it gives an opportunity to.
Service provider like you also to gain market share as a result, because competition will shift from price to the service quality.
In that respect how do you see the competition evolving outset hung up there. Thank you.
<unk>.
Sure very good question again, as we mentioned that.
Growth of express delivery business rely largely on its infrastructure and it takes years to accumulate and not a immediate quick fuel by the capital or a largely.
Concentrated customer base would mean.
Let me that much in our scenario, where we are indeed servicing the entire country and ecommerce platforms are also evolving with multi channels with all of that I believe the smaller players.
Have been.
Exiting the the scene or are not able to sustain because they are lacking the operating efficiency and lagging the scale advantage or leverage the M&A considerations in that regards we believe.
The quality of service the value of the brand our customer base all of these taken into consideration on top of whether they are profitable or not has always been our gauge in whether to consider M&A or other types of emerge in the past I believe chairman has described.
A very interesting.
Allergy, where we don't need to acquired the brand or acquire the entire business, but because of the operations on the ground naturally gravitate to those that are oh with higher brand awareness stability.
As a as well as long term prospects. So we believe in the current market market dynamics, we are not willing to pay for a brand even though at the operational level. There has been consolidation taking place.
The smaller players and they need to grow and I think specifically with a a company perhaps starting with the latter day. Its growth is very unique and it's it's a capital structure that the cash.
Utilization and in the pricing strategy approach.
Is an anomaly in our understanding and certainly we will continue to simply focus on what we can do and growing our business with.
A long term.
Our objective.
Maintained.
And I hope that answers your question if not we can certainly have.
Thank you so much.
Yeah.
Yeah. So thank you. Thank you so much.
This concludes our question and answer session I would like to turn the conference back over to Sophie Li for any closing remarks.
Thank you operator.
In closing on behalf of being tired with your management team, we'd like to thank you for your interest and participation in today's call.
Require any further information or have any interest in.
China seems to be.
We're going to reach out to keep the marketing department. Thank you for joining us today.
Let's see Paul.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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