Q3 2022 ZTO Express (Cayman) Inc Earnings Call
Good day and welcome to the C. T L Express third quarter financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on a touchtone phone.
To withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to two questions. Please.
Please note. This event is being recorded 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 results in the Investor Relations presentation were released earlier today and are available on the company's IR website I I R. W. E T O dot com.
On the call today from D. T O R. Mr Mason, Lai, Chairman and Chief Executive Officer.
This is sleeping Yan Chief Financial Officer, Mr. Lai will give a brief overview of the company's business operations and highlights that Michigan will go through the financials and guidance. They will both be available to answer your questions. During the Q&A session that follows.
I remind you that this call may constitute forward looking statements made under the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks uncertainties 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 performance or achievements to differ materially from those in the forward looking statements.
For 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 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 in Chinese before I translate for him in English.
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Hello, everyone and thank you for joining us today.
Third quarter of 2022.
The Liberty parcel volume up six points to 37 million, which increased 11, 7% year over year.
Summing up our market share by one three points.
Okay.
Customer satisfaction scores hitting new record.
And our end to end.
72 hour time benefits.
That's correct top amount next year.
Meanwhile, we achieved one <unk> seven.
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Tom.
Our bottom line by 16.
63, 1% year over year.
In the third quarter due to pandemic and other external factors.
Overall growth rate update perhaps industry to celebrate it.
<unk> focused on being the best we can to.
The wider implementation of CJR oriented and data driven process management.
Probably.
Enhanced operational excellence.
It also builds readiness to realize opportunities that's why I asked.
Tim.
Both okay.
While ensuring the normalized and that makes prevention is out of control.
<unk> was able to win on both volume and price for the third consecutive quarter and further widen the lead over our peers in the market share service quality and profitability.
Over the past few quarters, we have achieved remarkable results improving operational excellence and quality.
First of all by clothing through K, a customer accounts and the modifying all responding network policy.
What eliminated unnecessary and loss making contracts.
At the same time enhance the competitiveness of all of it.
Second we've partnered.
Further refinement and a wider utilization of our daily volume cost pocket dashboard tool.
And the visibility at the hustle floor level, which allowed us to recalibrate cost of cap rate and the pricing expectation therefore reduce for all stock obviously.
Third with further standardization of operating protocols.
Find the PPI and optimizing digitization capabilities.
Now track and analyze past statements working process by segment.
Exactly.
Therefore improve effectiveness of work shifts that design.
We will test it more timely increased utilization of labor facilities and transportation resources.
We do sell our packages and improve.
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The overall operational quality and efficiency.
Yeah.
Well optimizing of our own operations, we continue to focus on them. However, we can offer them network partners improve their comprehensive.
That may lead to market share gains.
We have gradually extended our volume cost and profit.
And that will.
First the real time data to all of us.
Fluids and assistant them to optimize them great financial results.
That's all it was low and negative growth for identify and solve problems from bottom up.
And ultimately you know.
Market competitiveness.
We further simplified partner policies and made them more applicable.
And the uniform.
We tapped into the incremental market share potential through interest alignment with <unk>.
And that pickup and delivery.
And effectively increased the customer acquisition and total profit at both marketing and fulfillment.
Ensuring the service qualities throughout all stages of.
Quotation.
And delivery is a big.
Condition, we expect new market share and increasing profit.
In the past few quarters, we have continued our fleet reclined, PPI and improve that we work and recommend mechanism.
Of course.
Two problems in a timely manner with integrated effort from all three segments of the entire network.
And it's a quarter of our leading Tanya index or widened among peers.
That's.
Explanation of it.
Fourth quarter, thus far.
Known factors, including pandemic situation.
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That's the impact.
Some some level was lower than expectations.
And it does fit.
Both with under pressure.
However, we have been focusing on the following priorities around our primary goal of accelerating market expansion.
By adding four new high quality book.
First of all strict has some ability for operational <unk>.
And that makes prevention.
So to ensure the smooth flow of packages.
Second enhancement of networking infrastructure capable and orderly manner.
Particularly how can they all went to plan and establish content delivery.
Delivery efficiency.
Higher currency, that's 40 platform.
Third further implementation of network management tools, including those of last mile policy, which without compromising the basket.
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The carrier direct access to market pricing.
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Salaries had expansion of quality preference with diversified capability.
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Colby on reducing pickup and delivery costs and it provides some limited services additions so on demand delivery to the door.
Therefore, enrich last mile customer experience for them.
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This is Daniel promotion of eco diversified products of services, which rely on hardware differentiated scale and the quality of the bank.
For example, standard time definite service to meet customer needs.
Looking ahead, the growth prospects of China, possibly.
Great.
Okay.
The divergence of key players have gradually become obvious and clear.
For the past 20 years.
It has skewed and relied on these shared success culture.
<unk> DNA.
Network with stability in this answer pass at scale and efficiency.
Part of the graph.
Coupled with increased efforts on management and to upgrade and rigorous work ethic.
We are confident to achieve our primary goal of a consolidated market share expansion with improving service quality and profitability Sheridan.
Sheridan daily parcel volume that will exceed the $100 million.
Now that's half our CFO to take us throughout the financial stuff.
Thank you Chairman Lai 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.
Analysis of our financial performance.
In economics and cash flow are posted on our website and I'll go through some of the highlights here.
In the third quarter, despite the recurring a pandemic shutdowns or restrictions and the weaker than expected economic outcome CPO delivered strong performances in both market share gain and profit expansion. So.
Supported by improving quality of services.
Parcel volume increased 11, 7%, which helped to expand our market share by one three points to reach 22, 1%.
The adjusted net income grew 63, 1% to $1 9 billion.
Total revenue increased by 21% to $8 9 billion.
ASP for the core express delivery business increased nine 9% or 12%.
While pricing became more stabilized we continue to optimize our policy effectiveness by enhancing volume mix as well as helping our network partners to strengthen their competitiveness and profitability.
Total cost of revenue was $6 5 billion, which increased 11, 6%.
They're all unit cost of revenue for the core express delivery business increased 12, 6% or one <unk>.
More specifically.
Line haul transportation costs per parcel decreased two 2% to 49.
We're rising fuel costs were offset by cost efficiency gain from increased use of high capacity trailer trucks improved road rate low grade and better route planning.
Unit sorting cost increased five 8% to 30.
Driven by increased labor costs, and higher depreciation and amortization charges.
Continue to raise our level of automation in response to increasing human resource cost.
Gross profit increased 55, 9% to $2 4 billion benefited from both volume and ASP increases on top of meaningful cost efficiency, despite lower than expected volume.
Gross profit margin rate increased six one points to 27, 3%.
SG&A expenses as a percentage of revenue dropped 0.3 points to four 9% demonstrating continued scale leverage by our corporate cost structure.
Income from operations increased 59, 9% to $2 2 billion and associated margin rate grew five nine points to 24, 3%.
Operating cash flow grew 58% to $2 8 billion.
Capital expenditure totaled $2 1 billion.
We are hopeful that COVID-19 restrictions with gradually ease off.
Macro economic condition would improve in 2023.
We believe that China's express delivery industry has great potential to grow over the longer term and <unk> would remain.
<unk> focused on market share gain upon achievement of targeted profit levels.
These will be made possible through continued efforts on standardization and Digitization, where data analytics and process improvements will lead to further upgrade of our leading operating efficiency and quality of earnings.
Taking into account the current market conditions the company revises. Its previously stated annual guidance.
Parcel volume for 2022 is expected to be in the range of $24 3 billion to $24 7 billion, representing a 9% to 11% increase year over year.
Meanwhile, the company remains confident in achieving no less than one percentage point increase.
In its market share for the entire year.
2022.
These estimates represent our current view, which are subject to change.
Now this concludes our prepared remarks operator, please open the call for questions. Thank you.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
At anytime your question Thats been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to two questions. At this time, we will pause momentarily to assemble our roster.
Our first question will come from Ronald Keung with Goldman Sachs. Please go ahead.
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Thank you Chuck.
Thank you management, just I have two questions one I just want to hear about how.
With the recent Covid.
New cases, how has that disrupted our business.
How are we ensuring.
Both and also good service quality in the times of slight disruptions in outlets in some of our operations and second I'd like to hear managements view on how the next year 2023 will play out because on both parcel volume growth and also pricing knowing that the price hike for the industry saw it in <unk>.
Timber last year and the whole industry has gone through a very healthy uplift in profitability and so as we lapped the price hike around three to four quarters now how are we thinking about pricing into next year. Thank you.
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Thank you Ronald for your question on EMEA.
I mean for the chairman.
First of all the impact of the pandemic and specifically those prevention and restriction measurements certainly has a negative impact on our business. So we on one hand focused on prevention.
On the other hand continued.
Girls focused.
We believe that after the major Congress meetings policies will gradual even though it is gradual but we'll certainly come about to stimulate the economy. The economy and continue to raise consumers' confidence in supply chain resume resuming its efficiency as well.
As logistic businesses, particularly express businesses.
For next year, we're looking at a low comp.
And we are hoping we are hopeful that the business will continue to.
Focus on quality of growth.
And the economic rebound will again provide greater opportunities for us. So for 2023, we think the likelihood of <unk>.
Previously experienced fierce competition is low.
As everyone starting to focus more gradually on a.
Quality of operations.
And as well as what we have seen the governments' conviction in regulating competitive.
Environment, ensuring healthy competitive dynamics taking place.
And the industry growth.
It had slowed down.
Yet the increase in volume in next year will be the target of everybody's.
Our focus in terms of growth because the installed base is there. So what we are doing and again is what we have been doing is laying the foundation of operational efficiency as well as quality of earnings not only to ourselves but to owner we're partners.
In that extent that they are ready and they're prepared as well.
In seizing the opportunity that will arise overall view is that in general as the policy continue to ease and relax.
On the.
Economic operations.
Begin to turn to normal.
Since then our focus will continue to.
The highlight our strengths focusing on quality of services and as we reach.
Our profit target, we will further our primary goal of expanding market share.
What we have seen in the past the divergence of the marketplace. It's clear the stronger will become stronger and the profitability will provide even further support for accelerated growth.
It will eventually be.
The winter will eventually be those who are well prepared who has the capability of being their best.
And time will tell time will certainly support.
Our longer term view that the industry growth has its potential and the winners will take.
What it deserved.
Thank you that's very useful.
Yeah.
Our next question will come from Lou <unk> with Citi. Please go ahead.
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Unit cost reduction going forward.
Would be the major cost reduction comes from and.
What the potential.
The cost reduction potential if we have any guidance or could give us any color on that and how should the capacity expansion plan.
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So let me translate.
The hike of the oil price hike in the third quarter the impact on our.
Total.
Cost per parcel is about <unk>.
As we all know that in the domestic oil price increased by about 30% and global.
Prices is somewhere around 25% to 30%. So we have still a one cent in.
Improvements on the per car so transportation costs.
It means that we have.
Received benefit from the efficiency of transportation.
Operations with larger capacity trailer trucks route planning and improvement of low right now on the sorting cost per parcel.
Increased 1% year over year.
We have seen lower than expected volume as we have a proportionate.
Higher fixed cost.
Specifically, we have our own <unk>.
Now in <unk>.
Sorting facilities. So the scale leverage is diminished in a sense when our volume is lower than expectations and another factor impacting the sortation cost per parcel is the increased depreciation and amortization from our new hubs in.
New equipment installation into putting in operation.
Going forward in the near term, but we will and we have seen and we will continue to benefit from our Digitization and operational excellence improvements.
Route planning shift designing.
Yeah.
Total <unk> and coordination all these will help us reduce per unit cost in the longer term as we have mentioned in in the past as we achieve our goal of.
And expanding market share more volume coming into our network then we are able to.
Realize even further cost productivity and efficiencies as our routes become more direct as our <unk>.
Number of Sortation right comes down.
In other words more and more of the par so greater portion of our parcel we only goes through sorting one or even zero sorting and that will significantly reduce the per unit cost.
Even further.
So I hope these answers your question.
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As far as capital.
Investment we will.
Continue to monitor macroeconomic conditions, and we will continue to.
Recalibrate our plan of investment, although we do believe that the peak investment period has been in the past we've already gone past that.
Cuz majority of our sorting hub and Super sorting hubs have been established and the ongoing capex expenditures with a bigger portion of that would go towards some of those upgrades.
Most of our infrastructure construction is already in place. So we do believe that the capex spending will be.
Tapered off or held steady.
Thank you Suzanne.
Thank you.
Our next question will come from Frank <unk> with <unk> capital markets. Please go ahead.
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The pandemic outbreak.
Okay.
Good day.
Great parcel volume growth is coming from.
Pandemic disruption or is related to <unk>.
Consumer expenditure, so if we excluding four dose.
Disruption for the next year, so what kind of growth rate you're targeting for and my second question is regarding Q2 divergent profitability amongst peers. So.
What is the key reason or the key factors that we have a better performance than the artist.
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To your first question the majority of the slowdown comes from the pandemic associated either prevention or restrictions or disruption on the supply chain the.
The consumers spending.
Is impacted by the larger environment of the overall logistics, the overall sentiment and certainly.
The pandemic impact.
Has a more significant negative.
Impact.
The likelihood for next year, well, we believe the industry.
It has an opportunity to reach a.
Double digit growth.
And the reason is that we think first of all it has a low base.
And then to.
As we are seeing the country is becoming more and more.
Capable of addressing.
Sporadic outbreaks and becomes more responsive in addressing localized outbreaks. So we do think the.
Government and the central government.
We'll gradually ease off.
Some of the restrictions so that the economy will return to.
Normal gradually.
So for our.
Profitability better than.
The peers, we think that there are some of the.
Perhaps three reasons one is for sure our quality of services, we've often talked about the price premium that <unk> enjoys.
We have consistently focusing on.
Quality of services differentiated.
Quality of services not only at the transit part by ensuring our network partners at the pickup and delivery and are also up to par and that really helped us maintain a level of price premium in the marketplace on the other hand also bringing in more.
Customers, who focus more on quality versus price.
Second.
Our own initiatives are all focused on.
And to an operational efficiencies also helped greatly ensuring our profitability and certainly we enjoy better scale leverage than anyone else.
Third which is more important than overarching because it is our primary focus on balancing our three priority volume increase market share gain.
Profit expansion.
Quality of services and then further we are exercising.
The efforts and discipline not only to balance all three for ourselves we are helping out there where partners. Because then they are able to invest alongside of us.
Further there is sustainable growth.
So we do believe going into <unk>.
Time of rebound and recovery.
In a much greater position to maintain our lead in and further expand our market presence.
Okay.
So we don't have to employees.
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Due to the partial.
Contribution or Dubai or no contribution right now.
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Yes.
Indeed to diversify our product is one of our initiatives.
And we have officially launched the standard express product.
We are client since 2021, which both differentiated services in terms of pre delivery phone call.
Guarantee timeliness and precision.
Commitments and last mile customer delivery.
Currently covered most of our major cities.
Perfect level cities in China around over 300, plus cities and the pre delivery.
<unk> certification is over 99%.
It has not.
We have plugged into the mainstream ordering platform in the marketplace and we are also amping up the onsite delivery rate.
Two strategic technology technology adjustment.
Daily volume for this particular product is over 400000 packages.
B and C customers are are enjoying the product.
We have been successfully expanding this protocol.
Yes. This protocol and we are committed to expand the services further across the nation.
Now this is only the license.
Our next question will come from Thomas Chong with Jefferies. Please go ahead.
So let me just I'll order to you as well.
<unk> Wen is one <unk>.
P J.
Once again the bonds on the same side based on the ability then yes you go ahead.
Yes.
Let me just a couple of quick ones is our level of <unk> on them.
<unk> <unk>, which is also been while you call Joe should compound will be leaving neither leaves us pretty tonnage housing.
Somebody is dosage Iberdrola is obviously game.
Goldman side, how do men.
But if I'm sure I highlight <unk> doser at total result.
I believe at Gamestop Amit.
Well when you choose somebody J Goldman.
They need <unk>.
Thanks management for taking my questions. My first question is about E.
E Commerce landscape given that we have been seeing our short form video.
It's ramping up quickly EMEA ask management about.
Our parcel volume mix.
On different platforms.
My second question is about our investment strategies given that.
We have been seeing Rps also investing in overseas.
Our local on demand just wanted to get some color.
The management with regard to our investment spending over the next couple of years given that our profitability is very good.
Thank you.
Thank you for your question I'll take these two questions.
We have been.
<unk> is a open platform we serve all.
The types of e-commerce, all forms of those youre right that the video streaming.
Such as billing and.
Chris Shelton.
And so on and so forth they are all becoming more and more of the mainstream players.
In addition to what we have previously seen the PMO and <unk>. So as a open platform. We do serve all in other words the development of their growth of their volume increases is consistent with our volume mix in serving these are.
And coming in new form of Commerce.
And the second question investment strategy overseas.
Uh huh.
In their early.
The years about 10 years ago, we have started looking into southeast Asia region. This investment however, we have come away with the.
<unk> experienced that first of all those markets are small much smaller if you put some of the country together.
They are probably equal to.
Only one of our provinces domestically so a resource.
It is both.
[noise] disbursement our resource allocation is according to the size and certainly there are certain countries in southeast Asia.
Their opportunity is similar to perhaps China about 10 15 years ago. Their ecommerce development is also enjoying great.
Outside and room for growth, but yet we have to be very careful.
We know now.
At work operations, we know the partner model, but yet you have some probably observed there are more quality.
Demand quantity of services becomes.
Available only when directly vertically operating model.
When that is more efficient so what we have done is as we put our footprint overseas in southeast Asia.
We also expanded our resource.
Your procurement in Europe , and in Africa, yet the expansion investment for overseas has to be careful it has to be systemic.
<unk> also observed recently the price.
Has been really.
The pricing.
Capability has been really weak in the international Arena part of it is of course, the global pandemic impact of another part of it is the whole industry is going through a recalibration 10, Yao being one of the key players have shifted most of it.
Volume to its own invested companies and the pricing in a way is volatile and so we are observing we are watching.
And on a greater sense of CTO have always been prudent in its <unk>.
Investment strategy so.
Can't tell you recently.
Certainty that we are going into international.
<unk>, but we are watching we are observing and finding the right opportunity becomes important for us too.
To allocate our rich resources.
Thank you.
Our last question will come from Frank <unk> with <unk>. Please go ahead.
Yeah.
Pardon me Mr. <unk> your line might be muted.
Yes.
Okay.
This concludes our question and answer session I would like to turn the conference back over to <unk> for any closing remarks.
Once again, thank you everybody for participating on our call. The company is in a great shape, we are taking the opportunity to better ourselves while the external macro environment continued to improve and we are hopeful the rebound will certainly.
Arrive in due time.
Another thing I want to report to you our point out to you that the board has recently approved an additional 500 million buyback plan for us to.
Ensure our return on.
Uh huh.
Interest a return on our.
Shareholders.
I look forward to speaking with you all.
No.
In the future. Thanks again for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.