Q4 2022 ZTO Express (Cayman) Inc Earnings Call
Thank you for standing by and welcome to the C. T R Express fourth quarter and fiscal year 2022 financial results conference call.
All participants will be in a listen only mode. After today's presentation there'll be an opportunity to ask questions. Please.
Please note. This event is being recorded I would now like to turn the conference over to MS. Sophie Li Director of capital market. Thank you Sophie. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us today, the company's results in the Investor Relations presentation.
Earlier today and are available on the company's IR website.
T O.
On the call today by <unk>.
Mr Chairman.
Chairman and Chief Executive Officer.
Weeping Yan Chief Financial Officer, Mr. Lai will give a brief overview.
Yes.
And her life, then I will go through the financials and the guidance we 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.
Payments are based on management's current expectations and current market and operating foundation.
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 statements.
Further information regarding this and other risks uncertainties and factors is included in the company's filings with the U S.
Securities Inc.
The company does not undertake any obligation to update any forward looking statements as a result of inflammation.
Events or otherwise, except as required under law. It is now my pleasure to introduce Mr. Mason line, Mr. Lai will read through his prepared remarks in their entirety in Chinese before I pass the floor.
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Hello, everyone. Thank you.
Today's conference call for the fourth quarter of 2022 E. T O delivered a parcel volume.
Point, 15, 9 million, which increased three 9% year over year, extending our market share by one five points.
Our Republic satisfaction ranking continued to be among the top of the industry with quality improvement.
Meanwhile, we achieved adjusted net income of two point Paul.
Quick one.
And over the fourth quarter of last year.
In 2022.
Despite a recurring.
Overall growers that expresses.
Celebrated faith.
Facing by Biomarin calendar.
<unk> focused internally and further solidified our industry, leading position with increased market share.
Service quality and profitability.
In 2000, and honey to our parcel volume reached so I'm planning for 39 billion, which extended our market share by one five points to 22, 1%.
I think time.
Adjusted net income grew 37.
Seven 6% over a year.
Point 81 billion.
Strong performances kidney problems concerted effort, everyone under the CTO brand.
We're adding network partners and the career sorry.
Start with a clear set of strategic goals well implemented specific work priorities at this point.
Firstly with Samsung and the standardized operational controls and removed or rectify the potential safety hazard.
During the pandemic period remain back to effort to ensure uninterrupted package flow of consumers that definitely without compromising prevention efforts.
Second the effective control quality and a coordination of all four stages of pickup floatation transportation and deliberate activity, we are able to improve our service quality and the public that infection, which in turn how does he feel brands explanation on the reputation.
Third we raised the level of fairness and transparency of network policy.
Particularly with regard to key customer operation.
Affecting the volume breakdown of profitability makeup of unique customer what's the somatic fully eliminated.
And the way toward market competitiveness as well as Bernie.
All of it.
Fourth we further integrated operation finance and it needs to improve data driven process matters.
But again, it's very important which mandate presented results of headquarter was upgraded to analytics that provide insights to help identify problems I mean, how many phases.
And solution.
No.
In 2022.
We called him he demonstrated resilience against the multiple halfway.
You'll also overcame virus challenges and keep the both volume and <unk>.
Right.
Hussein active here.
Which pump the effectiveness of our strategy and added confidence.
Pakistan, Brazil and improve operational excellence.
Entering the first quarter of 2023, we sell kind of recovery in China economy, where consumer confidence.
Have you increased the loss.
Just take the industry has been regarded as a strategic and important.
Foundation, though having journals nationally on them.
That's the pace setter vtsiom size will leave up to the country's expectation well St. Marian is stronger.
Under the priority.
The ability in sustainability, we will continue to execute our corporate strategy with the following initiative.
First ensure the safety of pickup and delivery coding and pass it and data security through all of our business processes.
Our fleet includes Concho as a measure to reduce accidents avoided cashless.
Second input output of infrastructure investment.
My capacity planning with me more than to say approach.
Automated investment Plannings, and who the operator network partner capabilities against the long term.
Third increased granularity and improve the accuracy of cost analyze the algorithms that price accordingly by line haul rock.
Do you have both digitize the tool to improve to improve the effectiveness of labor resource planning with improved.
Patient.
Increased utilization, though you can't eat including handsets.
Or.
Hover above all it environments FX.
Such as.
Second parcel volume Kpis. According to a beautiful market share goes to alleviate concerns all added weight you update your measure of five growth rate.
We werent recommend assessments with the associated operational concept, so as to drive improvement.
Annualized these shortcomings.
Both and provide support for targeted for them.
Provide us many practical choice as possible to better manage their data.
The firm up implementation blah, blah blah small policies to fully incentivize exposure.
<unk> retail customers.
With the hiring at the parent level and the industry.
We're truly achieve entrepreneurship and a better serve their customers.
Our salaries at last mile presence from both direct linkage and improve arguments.
By phone upgrades.
We're obviously M a c's of community service.
And not only would you say the brewpub studying wage loss in our products and services.
Seven strengthen our core business and optimize resources and the competitive advantages of equal businesses.
We rely on our core competencies and refined ever see fiber capabilities to some form of automated and the highest quality equal capability in nature.
We remain optimistic about the long term growth prospects of China's express delivery industry.
The problem will become stronger is that apparent development trend and its desire to pursue profitability has become mainstream.
Volume and market share up from the low price and the bottom line losses are not sustainable.
Only with robust network.
Patient delivery capacity.
All of your survey and excellent cost efficient.
Business developed into a bigger and stronger enterprise.
Data driven process management will help us continuously optimized precision and policy design.
This is a process.
Movement and efficiency the way it works.
We have quickly.
What we have and target what we want to achieve in order to accomplish a balanced set of results in accordance with our overall corporate strategy.
In 2023, we will accelerate the transformation from highest quantity to higher quality.
Ally home our shared success Parcher.
Yes stable network.
Operating capacity and strong cash flow, we will unify our thinking clearly lay offs ever goes make full use of our resources.
So I think the G maintain safety achieve on both quantity and quality.
Well, we will support our network partners and careers with fair ne and protect their rights in Egypt helped to improve our network partners capabilities and strengthen their confidence.
Well keep growing up our core business and expand our comprehensive logistics products and services to meet ever comes to you Martin.
As it covered as a corporate citizen, we will take a more social responsibilities and create greater social value.
That's well come out and therefore begin to introduce the financial results and status of the deal.
Thank you chairman and thank itself being 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.
Detailed analysis of our financial performances unit economics, and cash flow are posted on our website and I'll go through some of the highlights here.
We achieved volume targets by growing parcel volume nine 4% to $24 three 9 billion for the year with firm implementation of our consistent strategy.
Our leading market share expanded further by one five points to 22.1% well, we maintained superior quality of services.
Adjusted net income increased 37, 6% to $6 8 billion for the year.
Yeah.
Total revenue increased 7.1% to $9 9 billion for fourth quarter, and 16, 3% to $35 4 billion for the year annually.
Annual ASP for our core express the degree business increased four 7% and eight 1% for Q4 and full year, respectively as industry pricing became more and more stabilized.
Total cost of revenue was $7 1 billion and $26 3 billion, respectively for Q4 in 2022, which increased one 9% for Q4 and 10, 6% for the year.
Unit cost of revenue for the core express delivery business decreased <unk>, 7% for Q4 and increased two 4% for the year.
Unit transportation costs declined two 5% for Q4, 0.7% for the year, primarily due to increased use of self owned high capacity trailer trucks in improved low rate absorbing the negative impact from increased in diesel fuel price.
And it's sorting coarse was flat for Q4 and increased by 5.8% sort of year because of the higher level of automation and improved economics.
Our economies of scale offsetting partially increased labor cost and higher depreciation and amortization cost for automated sorting equipment and facilities placed in service.
Gross profit increased 23, 2% for Q4 and 37, 2% for the year as a result of increased volume and E. S. P.
Gross profit margin increased three seven points to 28, 1% for Q4 and $3 1.9.
225, 6% for the year.
SG&A, excluding SBC increased 18, 8% to 561 million for Q4 increased 16, 6% to $1 9 billion for the year.
SG&A, excluding SBC as a percentage of revenue remained low at five 7% for Q4 and five 4% for the year as our corporate cost structure remained lean and stable.
Income from operations, excluding XP SBC increased by 19, 8% for Q4 and 37, 6% for the year.
Associated margin increased two six points for Q4 and 3.5 points for the year.
Operating cash flow was 3.8 billion for Q4, and $11 5 billion 40 year, increasing 24, 7% and 50.
And 9% respectively.
Capex totaled $7 2 billion for the year.
Operating cash flow steadily increased and capex spending level stabilizes.
We anticipate free cash flow to further increase for 2023.
The company announced a.
37 cents U S dollar dividend for the year for shareholders on record as of April six 2023, representing a 30% dividend payout.
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Year to 25, 9% last year.
Now turning to our business outlook.
Given consideration for the current market conditions. The company expects the parcel volume up 2023 to be in the range of $28.78 billion to $29 75 billion equipped.
Equivalent to our 18% to 22% year over year increase.
Relative to the entire industry performance. The company is confident confident to achieve at least 1.5 percentage point increase in its market share for the entire year.
These estimates represent management's current and preliminary view and are subject to change.
Now this concludes our prepared remarks operator, please open the lines for questions. Thank you.
Thank you we will now begin the question and answer session. We ask you to limit yourself to two questions per person to ask a question. You May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing dickies if at anytime your questions have been addressed and you would like.
Cancel your request. Please press Star then to your first question comes from.
<unk> from <unk> capital. Please go ahead.
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Sure.
Thank you for your question.
First regarding the guidance then a post pandemic.
Chinese Chi we have as we enter into the first quarter observed.
Rebound and as the indication given by the government key conferences. They expect the entire industry's revenue with grew 7% and as we look at the numbers for the first.
Quarter, and and and relative to last year, we anticipate a reasonable level of growth about around 10% for the industry in terms of volume.
<unk> goal is to continue to expand our market share steadily by at least one and a half point, we set our goals to increase our volume.
By 18% to 22% and hence our relative to our prior experience in our color prior track.
Track record we believe this is achievable.
And regarding the.
The source or the makeup of the revenue certainly we won't be able to oh.
The case specific numbers because it really relates to all the other platforms. They wish for us to maintain a maintain these numbers within ourselves by ourselves, but what I wanted to add is that we as an open.
Platform, we do serve all the up and coming and increasing.
But in addition to the traditional e-commerce players.
For example, the that's again right and so we as the largest player with the biggest capacity and the level of quality of services. We typically command the highest portion of all their volume so going into 2022 23, we believe.
The growth is still there and we want to achieve the largest portion of that increment.
And the second part relates to the cost of our transportation.
Operation.
We have implemented.
Digitization projects initiatives, so that we have greater visibility in how our operations is being conducted and how we can improve the efficiency specifically low rates, our utilization of our vehicles as well as the route planning so with all of these we.
Believe that the.
Transportation cost trend will continue to be trending down.
Oh yeah.
Thank you. Your next question comes from Chen Lei.
From Morgan Stanley . Please go ahead.
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So let me translate my first question. So this is about the outlook Oh, our unit profitability off of this year. So last year, we have thing a very like so growth for the industry, but the company still achieved a remarkable earnings well.
And strong dividend payout I'm, just want to understand was a better growth outlook for the industry. This year with what's the unit cost down thanks to a higher utilization at lower few and also considering that digitalization tourists will continue to help the comp.
Need to manage its pricing and cost is it fair to say, we can continue to expect that the unit prostate can still increase from last year's level.
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Okay.
So let me translate and hopefully supplement to our chairman a response.
<unk> is a company that has been consistently.
Studying it.
<unk> in it and it also sounded perfect performing with sound execution.
You are aware that we focus on quality, we focus on our market share growth as well as profitability in all three by our track record has been improving.
Throughout the years Digitization in last year has.
Presented us with favorable results and we anticipate these.
These benefits will even further being demonstrated in 2023, one of the key things. In addition to what you just mentioned and what we communicated in the comments that we.
Expressed earlier, the the initiative relating to how we're better connecting between our sorting hubs our outlets as well as to the last mile delivery personnel the allocation of responsibility and also share of the benefit has.
Becoming one of our key focus, especially coming into 2000 Street. This world impact not only on the top line in terms of gaining more market share, bringing more volume as well as the deficiency all across the integrated process would generate greater cost efficiency.
And so these are what we anticipate going into 2023 and the goal we set for our business to achieve unit profit increases.
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So I'll translate I'm sorry, the second question about the Capex guidance for 2023 and considering that Michigan just mentioned off the cash flow will continue to increase this year is there any consideration of increasing your dividend payout ratio going forward. Thank you.
Thank you for your question regarding the Capex.
For 2022, it was $7 2 billion and if you look at our prior years, though it's around nine 9.3, $9 2 billion as we indicated before we have gone into the tail end of our investment cycle now going into the next investment cycle is more placement for our comprehensive.
Logistics services, our capabilities, including larger tracks of land for a comprehensive logistic park construction and development, but that will take time as we first.
First observe what the development of the market and the economy has in it a second time the development of our equal or businesses would also be a very steady and stable and systematic approach and not a one time.
Spending.
So they will.
That's our goal for our Capex spending it.
At the level of current or if not lower so with the continued strong cash performance says we believe our free cash flow will increase and after taking into consideration with the business needs in terms of our reinvestment are any access we believe it's rightfully so to get back to our shareholder.
So we do anticipate.
A high probability of us increasing our dividend payout in the future and secondly, if I might add as we communicate to them most of our investors that we are in the process of obtaining the 5% favorite bowl dividend tax rate so that.
M B could have a much efficient ah.
That tax structure coming out of China, as a way of a dividend.
With that in place hopefully in a year or two we are then able to further increase the.
Payback and return to our shareholders.
Thank you very much Cecilia Enzo life.
Thank you.
Thank you once again to ask a question. Please press Star then one on your telephone keypad and wait for them to be announced your next questions come from terrestrial from HSBC. Please go ahead.
Thank you.
For taking my question if I may ask two question. Please.
Can you help us understand.
You kind of balance sheet that you want to pursue a.
You have a very steady cash flow over the years and now.
With the Capex rolling over free cash flow rising you you have been running in that cash balance sheet in the past few years is that the new normal or you'd think that with the cash flow predictability on the leverage.
But moderately if not aggressively our balance sheet and returned excess cash to the shareholder in the form of a dividend or buyback and secondly on business going into 2023, and appreciate that you have given a guidance.
But any color you can share on how has been the start of the eel both in terms of.
Getting getting into Chinese new year coming out of Chinese new year and are on price competition. Thank you so much.
Uh huh.
Thank you for your question I saw you in English so I obtained permission from the chairman to answer you directly.
For the balance sheet, yes, we are looking to our past the and the business has been a very concerted conservative in terms of some borrowing and lending.
A borrower in terms of borrowing so our balance sheet is very.
Deleverage, we don't have that much leverage.
And now going into the next few years, where when we all win all cash flow our free cash flow becomes even greater than as I answered to the previous question, we intend to do a buyback or a return as dividend to our shareholders. So indeed that is our intention and our we do.
You have a high level of confidence that would be a cheap so with your second question. The 2023 any color when we went into the year, especially after the Chinese new year, we are including the open up of the pandemic restrictions we did see a.
We bond in the Chinese economy, albeit slow, but very steady topic, especially during the recent shopping gala as it relate to the AR went up the national holidays or national celebrated holidays of Threep March eight we saw a surge in the E comm.
<unk> packages are typically we have a business level of.
75 to 80 million, we saw that went up to 85 to 90 million packages a day for our business. So we do think there is a strong a buildup no either it's being one time or a consistent and continue it we were still.
Observing and well wait to see but given the seek no given the policy that's coming from the Central government. We believe the economy will be on a steady recovery and as the logistic business as we said that it needs all of the other industry in terms of benefiting obinna up any factor.
Oh, the economics development. So we do believe the the outcome for this year for our go to set as 18% to 22% above way above what the current.
Industry anticipated average grill.
It demonstrates our confidence in addition to our assessment of our own capabilities.
As far as pricing you mentioned that the pricing we have observed in 2022.
Starting actually in the second half very.
Apparently that the corporates are going for my bottom line or paying more attention to profit as opposed to using price to obtain.
Market share and this has been the case as we going into 2020 Threep are we have made some adjustments specifically for smaller parcels for that we have not seen any and market reactions that would.
Go towards a price competition. So we do believe we have got to attorney point, where the long term market price with steadily being stable and then a rising.
I hope that answers your question.
That indeed in it if I can squeeze just one very quick.
Quick question, if I may.
Can you remind us the rationale.
Raising the raising of the convertible bond despite the despite the strong balance sheet that as you already alluded to.
And is defined plan I'll, probably want to utilize that.
Yeah, certainly of course foremost is the way we operate our business U S. Dollar is something that we don't generate right, we only generate RMB onshore because all our most of our businesses is a R. M D.
And to buyback debt buyback pay dividend and then most importantly to inject cash into all our a project company that acquire land and language rights and invest in facilities. It provides us a greater advantage in terms of pricing if we are able to ink.
Jack with U S. Dollar the local government has a attitude of welcoming foreign investment into China. So with U S. Dollar we have that advantage in terms of our pricing and cost.
Absolutely that's very very clear. Thank you so much and have a lovely day.
Thank you very much.
Thank you. Your next question comes from from Goldman Sachs. Please go ahead.
Hey, yeah, like only adult Sophie Nah, I'm glad that you own biodiesel contact Pete Aquino.
Do you know you're not going to it's not like it's all about what the Taco youll be Dahal. Doug you guys saw one that was on T woman, you'll milk hung up she'd harder is it all hung it easy to I hope a quick read all you.
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Thank you management when I asked two questions. One is about the pricing that you mentioned some price cuts this year and had pretty good.
Effects on achieving your volume grows so do we see any other players following on what what.
Could that be a risk of pricing.
Pricing deterioration through this year, while volumes recover and the impact of that second is about you mentioned about the comprehensive logistics Pax on part of your <unk>.
<unk> you are putting into so how should we see that about what will this eventually look like would it be nationwide.
With express alongside somebody got others E T O like trucking companies all of those in house, how should we see a cooperation between those who kill entities and the effects of this logistics a pox construction. Thank you.
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Tissue.
Thank you for your question regarding the price and so before we get there. We wanted to give you a comprehensive view of our approach to pricing policy.
And the goal of our corporate has always been.
Hum.
Hum.
Mhm greater market share and after obtaining the tar.
Targeted profit go.
With this our policy certainly would be consistently.
Gordon's with this a three pronged approach. So it is stable it is consistent and it's sustainable.
In 2000.
'twenty three we have made some modifications, but it is all to the benefit of a stabilized network as.
As well as increased confidence to our and our partners. For example, our chairman mentioned that we have changed the way we are.
That goes for our network partners and also how we allocate those on market share gain.
Targets for them instead of using a year over year growth rates, we used their relative market share as of current and in the goal we set for them to achieve in terms of market share for the year, which is in a great to a great extent helped network partner.
We have also and.
Rented new.
What we call it the reward and recommend mechanism instead of them finding them for not achieving volume certain volume goes we focus more on positive reinforcement for them to grow on their own initiatives, but keeping there.
A sort of a pocket tight but without being punished. So these are some of the examples are we think that are all driving towards a stable network a sound policy no the.
Pricing.
War that you have express concerned with in the remarks, we have talked about earlier that the corporates are now focusing more on quality as opposed to.
The quantity but.
Not at all cost right volume is.
It is supposed to be profitable for the corporate and for the shareholders. Instead of just simply the topline. So we do observe we have observed.
The.
The changes in the sentiment and changes in the behavior of corporates in terms of their pricing practices.
Let me see if I missed anything.
So the 2023, we would reasonably anticipate price fluctuations here and there depending on the season, but S E T OS price.
We will remain to be the highest amongst all the players because we have.
<unk> gained price premium in the past with our quality of services and stability of our services as well as our scale and reach.
These are a stability that we have experience and are anticipating going into 2323, So price war.
Competition right.
The ones, yes, but certainly not on those what we had experienced in the past.
The second question relating to our comprehensive logistic.
The the growth of our logistic business. Eventually we believe it is going to be a comprehensive it's not just limited to express delivery.
We had in the past.
Oh developed businesses such as what you mentioned the L. T. L businesses, then going into.
2023, and onward, our goal remains to be a <unk>.
Eventually become a comprehensive logistic service provider in the past, we build our facilities, including the larger operation No parks.
Exclusively for express delivery, but as we grow as we've seen that.
They are more logistics services.
It needs being developed in the marketplace and our scale and reach allowed us to.
Access greater and greater let's just take our service markets.
Our ability to obtain resources as well as prudently operating them.
Has shown that in some of the examples that we have and pilot programs that we implemented.
As John that we are able to utilize our resources and maximize the use of our resources for comprehensive capabilities development. It has its advantages for example, one as we gather all the logistic services. In addition to the core <unk>.
The debris for example, clot warehouse right we have the in warehouse process one stop.
For our small b or large b customers.
T L business that serves the larger packages those businesses together in the same place Oh, one stop not only can drive synergy, but also on our utilization on a call front allow us to gain advantage Chairman gave an example of previous construction.
Design is only two floors, but now we have.
Sixth floor is being developed in two or three floors are used by our.
Other logistic businesses, which we have oh.
20, 20% or so investment.
One example, if you have a car warehouse on the third and fourth floor there.
<unk> order placement can be later, hence given better experience for their consumers because we don't need to go and fetch goods from other warehouse locations. We can just we call it zero distance our packaging zero distance odor fulfilling.
It improves our timeliness in the delivery as well let alone. The fact that we are able to reduce cost in terms of labor. When you have labor being paid on by by the number of processors. They do then Denver packages. They do they are nearby.
They are in the park and they can serve for express delivery. They can search for logistics. The L. T. L business. For example, so these utilization of the facilities of labors I'll provide us greater advantage in terms of the cost in terms of synergy and ultimately provide a better experience.
For the consumers and better efficiency for our customers and so to summarize the comprehensive logistic park itself, we are preparing to meet greater and increasing demand for our comprehensive logistics services not just express library.
And at the same time that we are able to drive synergy not only on the service front, but also on the cost front as well.
Sheesh.
Paula Thank you and I think operator, we are at the close of our time.
No further questions at this time I will now pass by.
To the management team for closing remarks.
Yeah. Thank you all very much for participating on today's call and thank you for a very good quality questions and I look forward to discussing and talking with you more as of now we don't have much travel restrictions. So look forward to speak to you and perhaps.
See you in person.
Thank you again.
Often it has now concluded. Thank you for attending today's presentation you may now disconnect.
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