Q4 2021 ZTO Express (Cayman) Inc Earnings Call
Okay.
Good day and welcome to the V T O conference call and webcast.
The fourth quarter and full year 2021 financial results.
All participants will be in a listen only mode.
Is this system.
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After todays presentation, there will be an opportunity to ask questions.
So I'll ask a question you May press Star then one touch Samsung So withdraw your question. Please press Star then two.
Please note this event is being recorded.
I'd now like to turn the conference over to MS Wei trend yet.
Financial Officer.
But as you entered the floor is yours ma'am.
Thank you operator.
Hello, everyone and thank you for joining us today, the company's results and an Investor Relations presentation were released earlier today and are available on the company's IR website at IR that D T O dot com.
On the call today from <unk> are Mr. Mason, Lai, Chairman and Chief Executive Officer.
MS Wei Ping Yang myself, Chief Financial Officer.
Mr. Lai will give a brief overview of the company's business operations and future plans.
Nope I myself will go through financials and guidance.
We will both be available to answer questions. During the Q&A session that follows.
Although.
I remind you that this call may contain forward looking statements made under the safe Harbor provisions of the private Security Litigation Reform Act of 1995.
Statements are based on management's current expectations and current market conditions and operating conditions and relate to events that involve known or unknown right.
<unk> and other factors all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results performances or achievements to differ materially from those in the forward looking statements.
Further information regarding these and other risks uncertainties and factors are included in the company's filings with the U S Securities and Exchange Commission.
The company does not undertake any obligation to update any forward looking statements as a result of new information future events or otherwise except as required by law.
It is now my pleasure to introduce Mr. Michael lie.
Mr. Lai will go through this prepared remarks in their entirety in Chinese before.
I translate for him in English.
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Your line.
Let me translate first.
Hello, everyone and thank you for joining us today.
In the fourth quarter of 2021, CTO delivered a $6 three postal and parcel volume, which increased 17, 2% and expanded our leading market share by zero point to point.
While maintaining our superior quality of service and customer satisfaction, we continued our focus on profitable growth volume.
And grew our net income 35% year over year to reach $1 75 billion.
The year of 2021, whether it was exceptional.
Facing continued COVID-19, pandemic shockwaves complex geopolitical environment and intense competition in the industry. Each year. Once again achieved solid growth against a slew of uncertainties by being self insured and the best we can.
We delivered $22 3 billion parcels and became the first express delivery company in the world to achieve an annual parcel volumes that exceed.
$20 billion.
Our market share advanced to a robust 26% for the year.
Everyone under the <unk> brand collaborated and made remarkable progress in enhancing brand recognition optimizing operational efficiencies and improving comprehensive capability.
First.
During the annual double 11 shopping festival AGL became the first expressly IP company with a daily capacity of over 100 million parcels across all stages.
Four of them.
Throughout the parcel flow.
The incremental volume of 529 billion parcels for the year solidified our number one position in the industry for the sixth consecutive year.
Second we help satisfy steady fastly.
Number one position above our peers for quality of services and customer satisfaction.
<unk> by a comprehensive set of indexes tracked by tenure and the customer complaint rate closely monitored by the state Post Bureau.
Third we made further strides on.
Creating adjust equitable and transparent environment in which our shared success culture was deepened.
Our sense of social responsibility entercom, but stability enhanced and our network partners are increasingly self motivated.
With renewed confidence.
Fourth.
We further integrated operations finance and technology through standardization and Digitization to manage and measure business processes.
Our vast network of into infrastructure resources could generate greater efficiencies and better economies.
As our core business certainly developed.
We endeavored to build up our comprehensive capabilities, such as services for heavy and bulky parcels integrated warehousing and delivery.
Ross border logistics.
Smart equipment design and manufacturing financial services.
Time definite and coaching services.
Last milepost and commercial solutions.
We were exploring and building more and more capabilities to cater towards varied logistic needs.
It was with joint effort by everyone there.
We were unable to overcome challenges and achieve satisfactory results towards our strategic goals in market share gain service quality and earnings.
In 2022, our strategy remains.
And our execution plans will task around the following five objectives.
First to achieve solid growth of our market share we must ensure the health of our network.
Start from the aspiration to empower we rely on objective data.
Differentiate varied conditions or potential associated with our network partners.
More suitable and precise policies and better incentivize overall volume growth.
Well outlets with slow or negative growth.
More field visits aim to gain deeper understanding of the real challenges our network partners face it can help us identify root causes and appropriate solutions.
Moreover, we must protect our rights in interest of those on the front line alleviate that bottleneck and workload and cost pressure by building last mile posts.
With ease of access to commerce and services for customers our market share will that lead growth.
Second.
To ensure profitability in earnings growth across the entire network, we need to build a systemic framework of digitized operating process.
<unk> and quick decision, making.
Practical implementation of technological tools can help bring visibility to key metrics for process effectiveness and efficiencies from end to end and allow us to advance from post modern reacted to in progress responses.
Or even ahead of time predictive.
The volume cost profit project, we initiated in later part of 2021 has generated meaningful results.
Further initiatives will help delineate op costs with greater granularity, so that more holistic accurate and timely pricing decisions can be made to drive better productivity.
Waste of resources and higher earnings.
Third.
To ensure continued lead in service quality, we need to further improve our service capabilities.
In 2022, we will pay continued attention to infrastructure development and focus more on optimized design and layout of the sorting centers consistent with longer term needs.
Our integrated trial are throughput model will gradually evolve with increasing volume intake and operations adaptation.
Meanwhile, we will improve performance evaluations as well as reward and recommend regulation.
Productive actions by network partners and carriers.
Their own initiatives.
A comprehensive systematic yet flexible governing system that is capable and.
Appiah bulk pliable to multiple.
Needs and customized demand for customer for products and services can help provide consistent efficient safe convenient and high quality product and services experience for our customers.
Fourth to ensure the safety of pickup and delivery transit and sorting and the flow of critical information through the whole process.
We must build and strictly enforce safety assurance measures.
I wrapped it operational process and.
And necessary checks for safety and precautions.
Our sometimes competing priorities.
Must be vigilant with both.
Paying close attention to conditions of the livelihood in frontline, while maintaining high levels of integrity and deter corruption and cultivate self discipline.
Fifth.
To ensure our continued development of our ecosystem, we need to enhance coordination and synergy.
This year, we will promote collaboration and seek opportunities to cross pollinate and expand customer base as well as market presence.
Through ongoing efforts to enhance our integrated service capabilities CTO can then effectively convey to our customers a comprehensive logistics brand concept of reliability stability and efficiency.
To achieve all of the above.
Of course, we need to ensure an environment conducive for shared success.
She had success culture, a culture that is built upon a common goal and behaviors by a group of people who trust one another work cohesively contribute as individuals or as a team.
Our future depends on the new generation of leaders.
Who has great potential and are recognized.
By effective talent identification and training.
System.
Boutique personal growth and given the chance to setup.
To step up.
For greater responsibilities under a fair promotion and elimination framework.
2022 is a year when CTO will turn 20.
And this is also the year in which we'll embark on a second venture.
Despite many uncertainties in the world.
The foundation of China's economy is solid and its upward momentum and stamina is strong.
Being an infrastructure.
That is crucial to day to day lives.
The express delivery industry will continue to maintain our medium to high speed of growth toward a promising future.
Our industry will continue its consolidation where strong players gets stronger.
The competitive dynamics gradually stabilize.
Price and quality will strike new balances.
Where competition advantages competitive advantages are.
Our increasingly demonstrated through scale and efficiency.
CTO is very favorably positioned in.
In the process of transforming from quality to be with higher.
From quantity to be with higher quality.
We will rely on digitized tools pay consistent attention to capacity and capability development.
Effective and efficient resource allocation.
Partner network stability with secured fundamental rights and interests.
The successful development of a competitive mode with high quality comprehensive logistics service capabilities within the next five years will ensure us.
To go from leading advantage towards absolute and equal advantaged.
We firmly believe that we can achieve greater and better results.
<unk> ahead.
Now, let's have Michigan take us through our financials.
Hello, everyone.
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 comparisons.
Detailed analysis of our financial performances unit economics and cash flow.
Hope it on our website and I will go through some of the highlights here.
We achieved volume targets by growing parcel volume 31, 1% to $22 3 billion for the year.
With firm implementation of our consistent strategy.
Our leading market share further expanded by 0.2 points to 26%, while maintaining superior quality of services for the year.
Our adjusted net income increased seven 8% to $4 9 billion.
Total revenue increased 11, 6% to $9 2 billion for Q4 and increased <unk>.
6% to 34 billion for the year.
Annual ASP for our core express delivery business declined one 3%.
And five 7% for the quarter and the year respectively.
As competition turning towards sensibility.
Average parcel weight drop contributed three out of the total of seven decrease in Asps for the year.
Average parcel weight decreased four 9% to one kilo for the year of 2021.
Total cost of revenue was $6 97 billion.
And 20 382 billion, respectively for Q4, and 2021, which increased eight 9% for the quarter and increased 22, 9% for the year.
Unit cost of revenue for the core express delivery business decreased two 9% for Q4 and for the year.
Unit transportation costs declined three 3% for Q4 and increased 0.8.
8% a year, primarily due to the combined effects of increased use of self owned high capacity trailer trucks and improved low rate.
As well as a negative impact or increase in diesel price.
And the expiry of favorable total fee waiver from mid February to me.
In 2020.
Unit sorting cost increased by four 1% for Q4 and declined one 1% for the year because of the higher level of automation and improved economies of scale offset by increased labor costs and higher depreciation and amortization charges.
Given.
There were more sets of automation sorting equipment and facilities placed in service.
Gross profit increased 21, 1% for Q4 and 12, 9% for the year.
Gross profit margin increased one nine points to 24, 4% for Q4 and decreased one five points or 21, 7% for the year.
Which resulted mainly from tissue driven ASP decline.
Partially offset by cost productivity.
SG&A exclude SBC increased.
13, 1% to 472 million for Q4, and increased 16, 3% to $1 6 billion for the year.
SG&A costs as a percentage of revenue remained low at five 1% for the quarter.
4% for the year as our corporate structure remains lean and stable.
Income from operations, excluding SBC increased by 31, 1% for Q4 and 14, 6% for the year.
<unk> margin increased three three points for Q4 and decreased one point for the year.
Which performed better.
And the gross profit margin change because of <unk>.
Positive SG&A leverage and increased other operating income, namely.
Super deduction, and government subsidy subsidies and tax rebates.
Operating cash flow with $3 billion for Q4, and $7 2 billion for the year, increasing 48, 2% and 45, 8% respectively.
Capex expenditure totaled $9 3 billion for the year and we secured larger tracts of land with developing comprehensive logistics facility.
And increased the number of self owned fleet and automation equipment.
We reasonably anticipate cash generated from operating activity.
Well exceed capital expenditures for 2022 and onwards.
The company announced a 25 cent U S dollar dividend for the year with shareholders on record as of April eight 2022, representing a 25, 9% dividend payout ratio similar to those of per your previous years.
Now turning to business outlook.
Considering the current market condition uncertainties the company expect the proppant volume.
Of 2022 to be in the range of $26 3 billion to 27 6 billion reps.
Representing 18% to 24% year over year increase that is well above the.
The anticipated industry average.
These estimates represent management's current and preliminary view and are subject to change.
Now this <unk>.
Our prepared remarks.
Operators. Please open the line for questions.
Thank you.
Yes ma'am.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on a touchtone phone.
If you're using a speakerphone, please pick up brands before pressing the keys.
Is there any type of question has been addressed we would like to withdraw your question. Please press Star then two.
As a courtesy please ask that you limit yourself to one question and a single follow up again. It is star then one to ask a question.
At this time, we'll just pause momentarily to assemble our roster.
The first question, we have will come from Quinn the Lucerne.
Morgan Stanley . Please go ahead.
Alright, Thank you operator.
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Now what do you think.
So I'll translate for myself.
Thank you your amendment for taking my question and consolidate.
Congratulations on the very solid fourth quarter result, so I have two questions.
The first question is about <unk>.
Cost trend.
So considering several factors.
A higher fuel price and potential labor cost inflation.
Also take into consideration all the potential economy of scale.
Following a higher volume being handled in this year and also the potential disruption from the refund Colbert resurgence, which might bring some fluctuation to the volume so what's the unit cost outlook for 2022 from the management's expectation. So this is the.
First question and the second question is about profitability. So we have heard from the industry that some of the players that discussing with their customers about pricing hikes due to the cost inflation.
Taking into consideration of the current economic outlook the potential pressure on your customers are facing considering for example, with the soft consumption demand growth as well as the cost inflation. There same thing or do you think there could be downside risks to the pricing or unit profitability.
Do you see downside risks to the previous guidance on the bottom line over 30% year on year profit growth Whats your guided last time. So these are my questions. Thank you.
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Thank you.
Yes.
Thank you for your question and let me.
Translate and supplement where needed.
Question, you really asked three questions. The first question is regarding the cost.
Assuming the current condition remains the stable.
Market conditions.
And.
The pandemic.
<unk> remains.
Under control.
We believe.
Our cost productivity will continue to generate results.
The digitized initiatives as well as more detailed level of management throughout our operating process for example, low rate.
Kris utilization of resources improvements.
Hi, there is a high probability that our costs will continue to be managed down.
Our supplement one point the oil price increase.
Increase.
The special situation in China, because there is a regulating mechanism.
So in the fourth quarter, we already seen such.
Impact coming through quite yet we are able to utilize some of the.
The stock that we purposefully.
Purchased so that we can.
Alleviate some of the cost increases in fact the.
Estimated.
Oil hike Paul.
Impact is about <unk> <unk> in the fourth quarter, and we were able to still gain around <unk>.
Productivity in our transportation segment.
That is to say that.
Very reasonably.
Dissipated call management.
We will give us a confidence that our overall operating costs.
We'll likely to continue to gain productivity.
And perhaps decrease.
Second question you asked is really around.
The.
Pricing.
What had happened in 2021 and before fierce competition and some of them are in sensible and deviating from the market reality those are no longer the case, we believe in 2020 to the stabilization of <unk>.
Pricing will go hand in hand, with the entire industry shift.
Hi, quantity to higher quality higher quality of earnings.
Speaking for ourselves.
Initiatives that we described earlier and gaining profitable growth.
Through specific mechanisms in pricing.
In finding waste and eliminating waste of resources providing proper.
Pricing to our network partners.
<unk> allow us to achieve our goal.
And currently.
First of all we didn't give guidance, but in any case on the earnings we have high confidence that we will significantly improve our earnings.
<unk> to 2021.
Thank you very much.
Yes.
And the next question, we have will come from Tim Ho.
Th capital.
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Well thanks, everyone.
Congratulations for a good.
Great.
Performance in 2021.
Under the extreme situation I have two questions. One is on what he said.
The investment plan in 2022 given.
The market competition is really competing on the uniqueness and competitiveness. So what enbridge area. They want to invest a further enhance our competitiveness and the second is.
How does Mr <unk> to see.
The logistic market to future given the JV is acquiring.
Upon.
So that is one one thing happened in logistic markets, what's going to happen next so I would like to hear what said Mr. <unk> view on that thank you.
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Okay.
Tissue.
Let me translate for Mr. Lai and also supplement answers.
We have consistently.
Invested in our infrastructure as well as comprehensive capabilities, because we do believe.
That the future of competition lies with not just the express delivery.
Shelf, but all the other comprehensive integrated.
Services that is ecosystem.
Our focus, especially.
Especially of late.
Collaboration.
Amongst all the ecosystem businesses that are developing in our.
System is to maximize the utilization.
Our past focus as well as going forward, we will continue to be on.
The land acquisition.
Vehicle upgrades and also automation level of improvement.
We are also increasingly paying more attention in supporting our network partners in providing them financial support where needed in developing their own capabilities that is consistent and in sync with our platform's capabilities.
And thirdly, we have also begin to invest in technology.
In Digitization, so as to drive further productivity.
And become more competitive in digitized solutions.
Our frontline.
Partners.
Interest and there.
Right.
In a way well preserved and protected because we are also investing in our last milepost system.
In summary, all of these will allow us to steadfastly consistently develop or capability internally as well as externally to go from.
Leading to absolute and equal advantaged.
The example, Mr. Lai gave relates to a track of land that we acquired lately that is designed to house six levels of operations.
The first two being designed for express delivery business.
And all of the above.
Our open for.
In warehouse processing and delivery as well as other comprehensive capabilities that are evolving such as cold chain services.
This will reduce.
Overall cost improve.
Timeliness.
And provide better experience for our customers.
Now you mentioned about.
The acquisition by Jim Don.
Of the bonds.
Certainly there are many ways of increasing capabilities, either through organic or inorganic growth.
As we set our sights on developing equal advantaged in the future we will explore.
Feasible and fit.
In terms of inorganic growth.
The development of total comprehensive capabilities has to be done.
In a way that is the most cost efficient draw.
Driving greater synergy.
As well as integrated Bowl.
Solutions.
I hope that answers your question.
Yes. It does thank you.
Thank you.
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Do you see that you could see one bump when you conduct your Asia, Shanghai ultrasonic should have gone through a conundrum.
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Okay Jamie.
Thank you John .
Sure Paul.
Sean.
Bob.
Doug a one zero harsher guang.
One final one for you Jonathan.
No Sean.
Many times, it's not more chat you continue to do well.
Thank you Jim now whaler Donyell mill.
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So let me translate for myself.
Yes.
Congrats for another strong quarter.
Two questions on my side first is thought about ADR, we heard some news about the FTC and we already see.
Secondly related to complain all preparing for.
Primarily due early things in Hong Kong so.
I wonder to see management.
Management share your view about the potential sort of political risk.
Okay.
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A couple of years into the future that you can share with us. Thank you.
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Joe the ice with us.
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First let me translate for months July for the first question.
He answered relating to the trailing are.
Integrated throughput.
System.
We have consistently throughout our past focus on efficiencies.
We.
Showed our advantage by investing early.
In land and facility.
Vehicles as well as sorting equipment.
As our competitors slowly catches up with their investment then that difference within those advantages are narrowing however, because of our increasing volume and our efficiencies in our traditional.
First layer, which is connection.
Very effectively run between sorting hubs center to center, we are developing.
Greater efficiencies and capabilities.
Amongst all the outlets.
Toward their connection better connection with our sorting hubs. The second layer is the origination outlet to destinations sorting hub. So therefore, they are bypassing the origination sorting center.
In the future.
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To achieve that.
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In helping our network partners.
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We expect in the next three to five years about 15% to 20% our volume.
Will come from.
The operating layers other than the original center to center.
Layer.
And the estimated cost reduction.
It's about 324 billion.
Now let me go through the second.
Your first question regarding the current.
Listing and SEC requirements.
But recently you all have seen there are active discussions.
Amongst the.
Authorities and government bodies.
So while we are hopeful that productive and practical solutions could be reached an agreement could be put in place.
We are at.
Active thing.
Searching.
Planning are researching and planning for our options.
Hong Kong.
Primary do listing is one of the option.
That will give us.
Proactive control.
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In the process of evaluating such options to us.
I should add that.
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Avoiding of disclosure you know that we have always been very open and transparent in providing all of the pertinent information to our investors who can make sound decisions.
This is also our initiatives are also for the purposes of opening up more investment opportunities for investors that are closer to our home market.
So this is a comprehensive.
Vision and approach.
Okay. Thank you very helpful.
Thank you.
And next we will take our fan so of bank of America.
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The real question is young they've got Cancienne that you've got.
Maybe now I'll translate my two questions number one is.
Covid lockdown impact on our volume.
What management be able to quantify a little bit, especially in cities that we are seeing more stringent lockdown, such as Shenzhen and Dongguan.
How is this impacting all with any volume and second question just.
It's about our time definite Paso business.
Could management provide an update and are there any target in terms of volume or revenue contribution in the medium to long term. Thank you.
First of all let me make a remark that we have already exceeded our one hour call and the market is already open. So we will refrain from any comments that could specifically.
Okay numbers and so on but we are willing to answer the question regarding the COVID-19 situation.
Cheers.
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Yeah John .
Let me just make some closing remarks here, because we really want to make sure all compliant.
The we have.
The trust in the government and agencies, who are working hard.
Day and night in addressing the Covid situation.
The impact is.
There for sure.
We're all aware of whats in the in the public with Enel.
Announced here and there are the numbers. So please pay attention to those and gather your numbers on.
And regarding the.
The time definite product very quick is a.
A product that we rolled out last year aim to standardize the time definite requirement input commitment.
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So please operator, we need to conclude this call.
Yes.
Yes.
Bob Chuck.
So where we are open for.
Cause subsequent where we have some scheduled many calls for UN Please feel free to connect with us.
Thank you, Matt I'm, sorry about that again the conference call has now concluded.
Thank the management team for your time today and thank you everyone for attending.
At this time you may this July <unk>. Thank you everyone take care and have a.
Wonderful day.
[music].