Q3 2023 ZTO Express (Cayman) Inc Earnings Call
Good day and welcome to the D T. Alex for third quarter, 2023 financial results Conference call.
All participants will be in listen only mode.
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Please note this event is being recorded.
I would now like to turn the conference over to Sophie Li. 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.
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On the call today from <unk> are Mr. Mason Chairman.
Chairman and Chief Executive Officer.
Switching Yang Chief Financial Officer, Mr. Lai will give a brief overview of the company's business operations and highlights followed by MS. Yan, who will go through the financials and the guidance.
Both be available to answer your questions during the Q&A session that follows.
I remind you that this call may contain forward looking statements made under the safe Harbor provisions of the private Securities Litigation Reform Act of 90 95.
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 companys 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 and Exchange Commission.
<unk> 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.
It is now my pleasure to introduce Mr. Mason right. Mr. Lai will waste through his prepared remarks in their entirety in Chinese before I translate for him in English.
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Thank you Chairman Lai.
Hello, everyone and thank you for joining today's conference call for its third quarter of 2023 CTO of parcel volume was 752 billion, which increased by 18, 1% and expanded our market share to 22, 4%.
We maintained our industry, leading service quality and achieved an adjusted profit of two point 34 billion, representing a 25% year over year growth.
In the third quarter, China's express delivery industry maintained relatively weaker and grew its volume by 16, 7% year over year at.
At the same time low price volume tradeoff became Brendan.
Facing disruptive price competition.
You ought to hear too is consistent strategy of maintaining a high level of service quality achieve.
Achieving targeted earnings while advancing our market presence.
The companys shored up defenses and exercise discipline around loan loss, making volume and improved cover main focus on affirming network stability and the long term competitiveness.
The following are some of our key initiative.
Firstly I place a great deal of emphasize end to end time, then bye bye.
By housing Digitization tool to initiate interference if needed to manage operating processes.
Quality standards for each of the key steps throughout the flow of package insured quick discovery of root causes to defect.
It's all to improve the end to end timeliness and overall customer satisfaction.
At the beginning of August.
Rather brought live from the city of Georgia and have suspended the operations of averaging that center on yearly amount.
<unk> property damages and loss of packages.
Facing natural disasters, we actively coordinated major or not and the modified.
So with that Bert peso to minimize negative impact on overall service quality across our network.
<unk> end to end 10 minutes returned to the top of the industry in September.
Secondly, well steadily improving service quadrant quality, we continuously seek optimal balance between improving 10 minutes and reducing costs.
Cost efficient thinking this quarter once again exceeded expectations.
Further refined assessment system raised the level of standardization and enhance the ability to isolate development workstation or individual task operator.
Through visibility comparability and were worried or recommend we promptly and effectively identify anomalies optimized and rectify them with precision and improved overall operational efficiency.
Certainly we have two upgrades capability and the capacity of having their OLED, which serves as an integral part of overall efficiency of the entire transit process.
We provide the technical include and the implementation of oversight on design and construction process.
<unk> measured service quality measure and information management, so as to improve our patent our operational efficiencies and last mile connectivity.
They express delivery industry in China has undergone 38 years of development and is at a critical turning point.
Despite frequent shifts in competitive landscape.
Leaders of our leaders of disputed advantages have clearly emerged.
CTO of have consistently pursued healthy and sustainable growth in the fourth assistant entertaining escalate on service quality and customer satisfaction and brand value with long term competitive strength.
Going forward and in accordance with the healthy pace, we will continue to strengthen our network foundation enrich product offering and innovate operation.
The following our five of our key initiatives.
First we will advance forward the implementation of marketing initiatives and encourage network partner to past market pricing to careers in order to incentivize pickup responsiveness, therefore increased non e-commerce volume.
Second we will accelerate the expansion of our last mile presence with to see life plus to reduce pickup and delivery cost in.
Housing person delivery fulfillment.
And improved network partners and program profitability.
Third we will continue to refine digitization processes and tools disseminate data analytics across frontline operations, and Arabic process management from postmortem to predictive and to drive greater effectiveness.
Fourth we will improve economic output of infrastructure investments by more scientifically aligning long term growth planning capital budget installed capacity and utilization optimization.
Basically we will continue to strengthen our ecommerce driven core express.
<unk> business.
Producing differentiated time definitely product.
Meanwhile, we will respond to a varied emerging market demand by designing and providing innovative products.
And services capabilities.
One thing forward towards comprehensive logistics expense.
During the recent double 11 shopping festival.
<unk> reached a new milestone with daily peso odder, surpassing $100 million four consecutive days, which peaked at over $116 million.
However, leading <unk> performance that till the wave two excellent quality faster delivery high volumes and stable pricing.
We leverage our very strong capacity and streamline operations to maximize scale and efficiency.
Not only approved the effectiveness and the sustainability of our strategic approach and also instilled greater confidence in our ability to execute for long term excellent.
China's express delivery industry is undergoing.
Distinctive dynamics shift bear volume with further concentrating you have quality continues to diverge, where the better and stronger our rising to even higher growth.
With comprehensive strengths with Duke and.
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Such a superior service quality.
Both partner network.
Higher profitability and stronger capital reserve.
Did you affirmatively sense in the leadership position.
We will continue to strive for balance to increases in all three of our strategic objectives of quality, earning and the scale going forward.
With the help of technology, we will focus on long term initiatives, such as diversifying in products and services, reducing can save frequencies, improving direct linkage across 40 Center College and last milepost.
Therefore, fortify you have a competitive edge.
Embarking from the newest milestone of our hendra millions parcels a day, we are committed to create increasing value to all.
Participants in the success of the T O, including customers employees partners suppliers and investors as well as the country and society that have nurtured over growth and development.
With that that's welcome our CFO Ms Yan to review our financials.
Thank you Tim and thank you Sophie Hello to everyone on the call.
Allow me to take us through the financials and guidance.
Please note that unless specifically mentioned all numbers I will be quoting are in RMB and percentages changes refer to year over year comparisons detailed financials.
All of our performance unit economics, and cash flow are posted on our website and I'll go through some of the highlights here in.
In the third quarter CTO maintain profitable growth, thanks to sound execution of our consistent corporate strategies.
Parcel volume increased 18, 1% to seven 5 billion and an adjusted net income grew 25% to $2 3 billion, while we maintained high quality of services and customer satisfaction.
Total revenue increased one 5% to $9 1 billion.
ASP for our core express delivery business decreased 13, 5% or 19%, mainly driven by mix shift impact from the decrease in the proportion of K, a volume increase in volume incentives and lower average weight per parcel.
We cranked up incentive to the extent necessary to protect existing market share as we faced radical price competition during the quarter.
Quarterly market share rose slightly by 0.3 points to 22, 4%.
Total cost of revenue was $6 4 billion, which decreased 2%.
Bind unit cost of sorting and transportation decreased 11% or nine.
Benefiting largely from economies of scale in addition.
Unit cost of line haul transportation decreased 11, 4% to 43 driven.
Driven by more effective route planning in conjunction with low rate improvements without negatively impacting timeliness.
Christmas in fuel prices also helped.
And the decrease of 10, 4% of 20 to 25 cents per unit sorting cost came from the increase in level of automation as well as labor efficiency gains achieved through standardization and operating procedures and optimization of performance metrics.
Gross profit increased 10, 7% to $2 7 billion as a combined result of increased volume offsetting ASP decline plus.
And it benefits from cost productivity gain.
Gross profit margin rate.
Gross profit margin rate increased two five points to 29, 8%.
SG&A expenses, excluding share based compensation as a percentage of revenue dropped to 0.1 points to four 8% demonstrating a healthy and lean corporate cost structure.
Income from operations increased 11, 4% to $2 4 billion and associated margin rate grew two four points to 26, 7% as we continued to improve quality of earnings to reach a level better than 2019, which is prior to the COVID-19 pandemic.
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Operating cash flow was $2 94 billion for the quota and EBITDA was $3 four of 5 billion.
Capital expenditure totaled $1 3 billion and we anticipate annual Capex in 2023 will come in below 7 billion.
We are on track to achieve another year of free cash flow.
Now moving on to our guidance.
We have previously guided one five percentage point annual market share gain and we strived to achieve such go up until it became no longer justifiable considering extreme price competition during the quarter. We made a decision to hold our ground and to then turn on attention to more longer term.
Game, such as improving end to end timeliness, reaching.
Reaching deep for operational effectiveness and efficiencies.
Market share gain will continue to be one of our key measures of growth yet it cannot be obtained by causing unnecessary losses to our bottom line as we further our balanced approach to all three aspects of our corporate strategies.
That note the company reiterates that its parcel volume for 2023 is expected to be in the range of 29.2 dollars 7 billion to 32 4 billion, representing a 22, 24% increase year over year.
These estimates represent management's current and preliminary view, which are subject to change now this concludes our prepared remarks.
Operator, please open the line 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 speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
We ask that you please limit yourself to two questions.
At this time, we will pause momentarily to assemble the roster.
And our first question comes from Keith <unk> of Morgan Stanley.
Please go ahead.
Thank you.
Okay.
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Yeah, So and Sylvia and thank you for the opportune at all for the opportunity to ask the question a couple of regulations on very solid results. Despite a bank that's very competition pressure I have two questions. The first one is about the competition strategy. We noted that the company year to date has achieved very balanced.
Oh gross in terms of profitability in a market share game, but we do notice that the market the competition stretching from peers may have.
<unk> changed some of them seems to be quite difficult in terms of profitability in the third quarter results are some of them also wait until I get that next year. They are priority will be modest share gain in terms of profitability. So are the question is what's the competition strategy from our company.
In the first quarter of this year and into 'twenty 'twenty four do we still think the target that our profit growth to be faster than volume growth and our market share will continue to grow all of us as peers is achievable.
My second question is about dividend payout. So we'd do notice that the Capex has decreased on a year on year basis and free cash flow remains very healthy Ah. We did mention that we have the intention to increase the dividend payout.
To reward our shareholders do we have a higher visibility on the dividend pay out for our four year. After our full year results next year.
Yes.
Okay.
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Now let me first answer translate the first question by all four chairman the the first question relates to the competitive outlook.
We've always focused on our long term.
Growth, because we understand that our express delivery business.
The industry nature is a long term marathon instead of a short sprint CTO has consistently focused on all three aspects of the corporate strategy. We maintained the principle that we don't do lossmaking businesses. So consistently in the <unk>.
Past, we have been able to adhere to our three pronged approach.
Which is conditioned upon quality of services in targeted.
Earnings goal achieved we will improve.
Improve our market share so that still stays the same is the consistent going forward given a market dynamic changes.
However, we always believe the strength of quality of services and capacity to deliver such high quality services will continue to draw customers enjoy a market share and timeliness and our customer satisfaction and also the brand awareness will continue to be our focus.
Going forward and we believe from a strategic standpoint that will further extend our goal again market share it will remain now.
The what you mentioned, specifically profit volume and market share development is always going to be a balance and we still believe we are confident to achieve the goals that we set.
The second part of question I'll answer that the business is operating at its optimal and it continued to go.
Go up to the higher increase in the higher level. So the capex spending for our core express delivery businesses is hum pretty much set so as we look into developing our comprehensive logistic capabilities it might be some investment cycles come through but no.
Now what we are looking at it's been gradual and not all of a sudden right. So it's a matter of time for us to raise our dividend payout.
Payout ratio because it is our clear.
That is to return our capital returned to investment to all shareholders.
Two weeks ago.
Thank you.
Handel.
Yeah.
The next question comes from Ronald Skewing of Goldman Sachs. Please go ahead.
Yeah, I know your adult Sophie.
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Yeah.
Thank you for your question that would be translated in English I think in terms of the current competitive landscape well, it's been quite concerning but we've actually done really well but earnings have grown.
Healthily and we also generated free cash flow.
So this outperformance versus peers. It means how should we think about the landscape from here if we could capture.
Very healthy.
And cash flow should this have you shrink there now position into the longer term. So oh are we.
We are trending well even in this competitive environment and how do we see the outlook for 2024 as a result of a strategy that my second question is about cellphone connects potential we see some of the limited trading volume in all cultures.
Does that lead to that expect itself out connect.
Any.
Proactive steps that.
Cause could peak.
Expediting this up I felt that kind of potential.
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Michael How're you doing.
Thank you.
Okay.
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All of them.
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Thank you Ronald So let me translate for chairman.
Answers.
As far as the competitive landscape, we think the long term.
Directory is continue to stabilize.
And as you can see that the number in the marketplace about eight or nine but we don't think there are major changes however, the.
Diversification I shouldn't say, the bifurcation is becoming more and more apparent where you have an advantage in cost efficiency and quality of services. Those will all eventually win more market share and increase increased market presence.
In the past we've always focused on all three and then those are continue to be off all our focus and relatively speaking however, as we see that the development of our E. Commerce. So overall, our profit is being Ah is.
His meeting resistance.
Does the price competition so.
Offering.
More diversed product and services.
For example increase the Nike Commerce packages.
I'll also servicing more of the reverse logistic or return packages will help us improve the earnings of our network outlets as well Oh careers, so focusing on those areas improving the network.
Works stability at the same time, improving our overall capability of serving not just e-commerce packages, but including a higher percentage of nine commerce packages will help us.
Her or offset some of the impact from the e-commerce well concentration.
So in other words, we do believe.
Out of the three are relatively speaking, we will focus not risks, but in that regard it's more of the enriched product offering and varied our revenue structure so that.
It could propel us forward into the future, where we maintained a high level of quality of earnings and at the same time, increasing our market share.
The second question relates to the strat.
The strategy of going into the AR goggle at home are we.
Thank God.
We will continue to maintain high quality operations and that is really the key.
Increasing our.
Volume of trading off for liquidity this is somewhat more.
Determined by some of the metrics on measurement.
The company has been included in the stock inspection scope.
Oh the stock snack.
Adjustments window for the stock connect is in March and September each year and according to the private policy measurements during the.
Measurement period.
Must meet certain standards of.
Trading volume and so on and so forth and we believe we have a based on current information we have a high probability of.
<unk> entered or admitted into the connect by next year in March.
Yeah.
Thanks Bill.
Yeah.
Yeah.
The next question comes from Aaron <unk> of.
UBS. Please go ahead.
Oh.
So as it gets older.
Yeah consequences, the incentives that you build up the scale.
Oh good.
Good job.
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Yeah.
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Joe you could go from Goldman.
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You got it.
You can go for you.
What caused that.
But what's your ability to get their time being wasted.
Hi, guys.
Yeah.
Let me translate myself first.
To me, it's a lie.
And so thank you for taking my question and congrats for the solid Q3 earnings.
And I got two questions one is about our capacity utilization.
As you mentioned the idea of a real cheap it peaked lady volume I mean W. La with to around like a 160 million households.
I'm, a big tourist or what are what is our ideal capacity utilized.
Would you like to train weights.
Yeah, and what's our like our Capex expenditure.
Our plan going forward.
Lucky.
In Mexico.
And the second question is about our like long term I'm all about our long term strategy to focus on the mutual heightened puzzles like.
Mr Lai mentioned.
The business also saw the indie radio puzzles, so what's what's the development so far.
What kind of expectation we should have.
Like the the volume share.
Uh huh.
And I'll go like Q2 was a true to what percentage going forward. Thank you so much.
Okay.
So the G E.
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Tony.
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Sean.
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Thanks, Jeff.
Okay. The first question relates to our optimum.
Capacity.
We've always focused on infrastructure development and we are one of the players.
Players.
Amongst all the industry players we are the one with the highest.
Level of self owned facilities and also our transportation fleet.
And we have currently.
After the double 11 achieved over 100 million day level and that is there.
Current most optimum capacity because that is where all cost is the most effective or efficient.
We have throughout the years invested and build infrastructure.
And in across the whole country, especially in the key major nodes are major cities.
Across the nation.
Compared to the past this year, our capex spending is going to come in below <unk> 7 billion for next year will be somewhere below 6 billion, but we believe some of our facilities do require upgrades and some have a phase two.
A phase III that could be easily.
Developed to double the capacity so our actual investment will most definitely taper down.
The third question relate to.
Our diversified product offerings.
Oh the <unk>.
Current.
Current year of our standardized packages are the the increase in its volume has.
Waste passed on much faster than our regular express packages. So we do believe we have built up our momentum to increase.
Within express delivery, a time definite product and outside focusing on developing more of the non e-commerce packages.
We do see this as a key initiative because it could help us.
Improve the quality.
Quality of earnings by our network partner and also careers as we ensure the careers receive.
Market front end pricing instead of up.
The same.
Pricing Gibbons for regular express delivery packages, so that they are more motivated.
To work for themselves to improve.
Their customer connect connection and also improve quality of services, we have made it a mandate and putting measurements around the oh two door pick up so that they are more timely and there are more responsive in.
This overall approach.
Without.
Disclosing the specific percentages, but we do believe or we do want to have this I'm very proud of offering and at the same time it could come back and help us improve the overall earnings and also quality of Oh.
Earnings for the <unk>.
All of the players, including US and also our network partners and careers.
Okay.
Sure.
In Q.
Okay.
Yeah.
The next question comes from John I N.
C C.
Please go ahead.
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Yeah.
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I was just hoping that you might have.
Without a doubt.
What about your own book.
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I'm going to do today.
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Doug I want to know what I see.
All women.
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Okay.
First off I want to acknowledge.
Let me translate for myself.
Oh, Yeah Sophie.
Oh, taking my question. So two questions. So first one is about Ramos.
You called muscle.
Because we know these are kind of a business big.
Great crowds, Ohio, So this quirky.
Oh, well generates a return so okay, we should all be box Oh volume.
Tons of.
Just kind of fitness and Oh, I'll walk you through our strategy.
The second one is about all about smile and sensors Sunshine.
She puzzles supermarket.
As Mike mentioned.
Okay, and you should always odds oh, its current stage how many of.
These facilities are there.
I know you set any targets for the future and also it would be very helpful. If you can share with us the benefits of that.
These are conservative for example, in Congo service quality, our Cogs and <unk>.
The benefits to all our crude I got.
Oh, Thank you operation. Thank you.
G H.
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So the G&A in Baltimore.
Okay.
Can watch.
Yeah.
Michelle would you do you think China choosing me, Sam I'm not sure Uh Huh.
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One woman meant sincerely answer yet.
Kind of a dollar to the niche are we'll deal with it.
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So by the time I'm not sure there's a chance to soybean suggest Sheffield.
Uh huh.
Well, Virginia.
So yeah.
She seems as if we're watching so it's just the shelf, whereas this is Jeremy.
You bet.
Michelle would you assign me at the time.
There's timing on this is it's just I think that's what it is.
D, which is the one she what Dino.
As you well know under your friendship.
Has that changed your thoughts your puppet and chef our year over year.
Not yet.
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This golf diligence when she needs us.
So good chunk hit him with any chance to their teaching.
And pushes and pulls.
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That's helpful.
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Ciena continually every change out play basketball.
So T mobile which is harder than women.
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Gary.
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Family.
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Chico in sheet.
Finally, a woman.
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Zynga to their children.
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Toyota choose denatures or.
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Okay.
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Dan It chooses to.
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Sure.
So <unk> got to stop.
Sure.
First question with regards to the reverse logistic packages.
Nowadays if we look at the combined volume of all.
Major players all major platform of E. Commerce. The returns volume is somewhat everyday around right around 10 million.
So the increase in the Sun.
A portion of these packages really rely on or it's dependent on how fast we can respond to pick up and how well the service is provided.
Because we saw this a significant volume in the marketplace. We have started to pay more attention and tries to improve our ability to respond but for example, the two hour average pick up a time window, we are developing.
<unk> capabilities are to pick up even faster within and shorted into two hours. So we think that the continuous focus and also the the exercise or training of our.
The capacity or capabilities to pick up on a more timely basis has helped us to improve the development of our that side of the capability and we have seen the increase in the reverse businesses a volume at a very promising.
And fast pace.
The second part with guarding the last mile development.
We currently have over 10000.
Location and are in the under the brand of Tushie, plus and our target is to grow even more and the benefit is really a several fold.
First of all as we could allow our careers to receive the market price in other words, they are working for themselves and they were not only able to improve their their sales or increase their earnings but they could also be motivated.
To provide better services and develop better connectivity with our customers not with all of them with their with their customers.
Uh huh.
Key benefit for the industry as a whole is that we could indeed utilized.
The last mile post our presence to help the entire industry to reduce our.
The delivery cost as the concentration of the delivery packages increases as volume increase for the marketplace. We think that they'll continue to hire people to deliver has is not feasible. So the role of last mile Post Oh play.
Reis is to help reduce the delivery cost and develop better linkage develop them more.
Our timeliness and responsiveness of our customer services.
With the within its radius, we think the.
Pick up and the the drop off by consumers to the to have their packages shipped will continue to evolve and the penetration ratio or the proportion of such packages being dropped off are being picked up at the polls will increase.
And then secondly, we think it will what you would provide opportunities.
For the last mile to service not just express deliveries it would have other services within the local settings. For example, opening the locks or delivery other.
Life necessities. So this is a comprehensive service.
Point, where the consumers will have much better.
Stickiness to those those a locations.
And this is a.
Strategy that we will continue to further that as we not only build the infrastructure for the industry, but also provide better faster and more responsive services to our customers beyond our express delivery related services.
Yeah.
Oh sure.
[laughter].
So operate I believe it will be the last question, we could take and once again. Thank you everybody for joining today's call and we look forward to have further discussions with you all and thank you and have a great day and great evening.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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