Q2 2019 Earnings Call
Good morning, and welcome to the XE to express announcement or the second quarter financial results on August 15 2019.
All participants will be in a listen only mode.
Should you need any assistance. Please signal a conference specialist by pressing disgust all key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Sophie Li IR Director. 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 available on the Companys IR website at the IR at <unk> Dot com.
On the call today Ramzi deal I'm, Mr. Mason, why chairman and Chief Executive Officer enemy. We began to finish off. These are Mr. law will give a brief overview of the companys business operations and highlight.
Well I would if I missed the n. well go through what even it shows in the guidance. They will both be available to answer your questions. During the <unk> session that follows.
I remind you that this call may contain forward looking statements made on Liberty Safe Harbor provisions of the private Securities Litigation Reform Act of mining maybe five.
Such statements are based on management's current expectations and current market and operating conditions and when they swing then that involve known or along with.
These 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 woman or achievements to differ materially from those seen before were looking Siemens.
Further information regarding this and other with uncertainties and other 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 statements as a result of new information future events or otherwise except as required under law.
It is now my pleasure to introduce Mr. Mason lie.
So I won't waste through his prepared remarks in their entirety in tiny before I translate for him English.
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Okay, Let me translate what chairman Hello, everyone. Thank you for joining us.
Call to discuss the company's second quarter results.
During the quarter these young men and industry, leading quality and customer satisfaction and delivered three point 11 billion packages.
An increase of 46.8% year over year, or 18.5% percentage points higher than the industry average.
The company's market share rose 2.5 percentage points to 90.9%. Meanwhile, adjusted net income grew 25.6% to one point 38 billion.
Video has income.
And fully executing our core strategy that is.
We will continuously expand our market share based on high quality of service and targeted level of profit.
At the beginning of 2019, we accelerated volume growth rate to 15 percentage points faster than the industry average.
From the previous 10 percentage points.
Video second quarter results reflected the soundness of harbor strategy and our ability to effectively execute.
In network why bother incentive matrix, we introduced in the first quarter continued to take opportunity in driving volume growth in the second quarter.
That's fair and A's and the transparency enhanced several legacy program and simply that many individualized arrangement.
As a result, while the incentives are optimized and the network is better equipped to address intensifying competition.
That's one of the measures to further inflame and standardized pickup and delivery fee schedules across the network.
Detailing how the corporation and Weve, Alan the equity among major pickup region.
And their corresponding deliberately region, so as to ensure the ability of long term sustainability of network.
Unit volume grows significantly these young men tend leadership positioning service quality and the customer satisfaction. In addition, we continue to achieve cost productivity.
So scale advantage in technology, we were able to better leverage our infrastructure capacity and many it's incremental costs.
Florida high volume growth.
Combined the sorting Harman line haul transportation costs for possible declined 8.6%, partially offsetting competition that subsidy increases.
Consequently, these you achieved this target and delivered operating profit growth in the second quarter.
China Express delivery industry benefited greatly from the rapid growth of the country's ecommerce driven consumer economy.
New business models will consumption sales and distribution and logistics continue to rise quickly involved.
Together with added attention from strategic and financial investment that become more involved.
China Express delivery businesses are facing new commercial demands and the new challenges from changing industry dynamics.
Sumant uncompetitive at CTO must keep strengthening or computers.
As well as building a wider mode to sustain our future growth.
First of all we must drive to be the best at what's within our control.
For example, quicker implementation of new strategies across network with deeper and wider proliferation.
Regional level PPI matrix with proven design and constant enhancements cycle.
Then I would say that it integration and a collaborative use of platform resources.
And accelerated establishment of data driven and value add operational management work.
And then just a few.
Secondly, when you do things I have about how to leverage the views that advantages you network coverage and financial resources, let's say market opportunities and the wider competitive lead on one hand, we intend to thoroughly men's hover standardize pickup and delivery fee schedules. The crossover network. It will allow these your frontline career to achieve the high risk income among their peers, that's become self motivated to be more business with operation improved service quality and customer loyalty.
On the other hand, we will resource plan for last mile to be able to low cost and value added capabilities to support.
Competitive strength and stability of our entire network.
In addition, we will actively explore new ways to enhance our value proposition and comprehensive logistics and supply chain management services to better serve new commercial meat.
On maximizing the value and the capabilities, including talent and the capital resources, we have assembled armour platform.
We are able to establish systematic competitive advantage that are less dependent on online or offline traditional retail and e-commerce .
Diagnostics trough delivery market has great potential for extension.
We believe it is likely to maintain steady growth in the near term.
Everyone on their disease.
Brand is proud of our first half of 2019 performances.
And we are energized to work harder and to continue charge ahead.
We firmly believe that we can ensure our long term success I know him and the leverage operating trends.
Working smarter.
Congratulations and ingrained in the future.
Thank you for your attention next.
Let us hear Bonnie yeah, well discuss our financials.
Thank you chairman lie and Hello to everyone on the call as I go through our financial results. Please note that unless specifically noted all numbers quoted are in RMB and percentage changes refer to year over year comparison.
Detailed analysis of our financial performance and economics and cash flow details are posted on our website.
And I will highlight some of the key points.
Hello.
Our parcel volume grew 18.8 percentage points faster than the industry average and our market share was 19.9% for the quarter and we exceeded market expectations on adjusted net income in spite of more parcel price decline in previously anticipated total revenue, where our core express business grew.
3.2%.
The 33.4% cost of goods sold increased against a 46.8% parcel volume growth indicated healthy scale leverage and effective cost management and CTO.
Gross profit grew 21.4% in income from operations grew 25.6% as we maintain a stable and efficient corporate structure, where SGN, a excluding SBC as a percentage of revenue decreased to 5.4% from here that a 5.7% last year.
Income from operations, excluding SBC grew 23.6% and op margin rate decreased 1.3 percentage points as a result of volume increased.
Cause incentive increase.
Only fully in the cost productivity being only absorbed partial.
The impact of incentive comp increase.
GAAP basis income variances reflected a onetime disposal gain in second quarter of 2018 any amount of 225 million.
Taking into that consideration net income increased 27.9% and if we further take.
If we further exclude SBC adjusted net income grew 25.6% to reach 1.38 billion.
And adjusted net income margin rate declined slightly or 0.7 percentage points to 25.4%.
One additional note on key account revenues from key accounts were approximately 650 million, which grew 60.2% and accounted for around 12% of our total revenue.
Now turning to per parcel unit economics.
The ASP decline was 21 cents.
Out of which 20 cents was associated with volume incentives.
Price competition intensified, especially in the month of June and we responded accordingly.
Cost of goods sold went down by 9%.
Nine cents per parcel.
Of which the increased use of self owned vehicles with increasing proportion of high capacity trailer trucks helped drive down transportation costs by six cents per parcel and an increase in the number of automated sorting equipment helped keeping the number of headcount increases to only 18.6% and contributed six cents two cents reduction in sorting how costs per parcel.
With better SGN a leverage.
We were able to crawl back another two cents.
And adjusted operating income per parcel declined nine cents.
Operating cash flow was 1.99 billion in Capex spending was 812 million which brings.
Year to date total capex spending to 1.7 billion.
Our annual Capex commitment remains six to 8 billion as we expect cash outlay to be around $4 billion to $6 billion for the year.
The company maintains its annual forecast and guidance.
Given the market consider given the market condition and also our operational capabilities.
This concludes our prepared marks remarks.
And we will now open the line for questions.
Please note that.
If you would please limit your questions to only two so as to give more time to everyone on the call.
Isabella 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 Touchtone fine.
If you are using a speakerphone please pick up your handset, but full pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Your first question today comes from Valiant Die with Citi.
Please go ahead.
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First let me translate for chairman.
The competition in the marketplace has been intensify in the second quarter in the second quarter and we look into the second half of the year there are hopes perhaps the price level.
And we are hoping for that.
And regarding the rule.
We considered the strategy to be our main focus which is to maintain quality of services as we achieve targeted.
Earnings we will.
Expand our market share consistently at the price practice. If you will has been deviating from the market economy and the.
Nature of the business, which we always believe that making money is important for us effective parcel and are being brought in to the business could sustain our long term growth with that in mind.
We.
Hope that the second.
Half of the year should see.
The price becomes more reasonable and also for the longer term, we believe price stabilization and perhaps increase is inevitable.
Now borrowing if I may are answered the other question points that you have.
Yes, you're right that we have been very effective in executing our strategy.
Given the market environment, and our ability to deliver consistently on our strategy, we believe imprudent.
As always in our approach and certainly we have high confidence in our ability to deliver on our overall growth target, which is exceeding market.
Average by at least 15 percentage points and increase our distance in terms of market share compared to our peers second half will continue to have such focus for us.
And we don't believe changing.
Guidance will make any difference in terms of how we would execute on our overall strategy we maintain our.
Targeted profit.
The guidance and volume increases as well as price.
Policies in price actions will all be dependent on the market and we have the ability to adjust accordingly, accordingly, and not only on the price side, but also on our cost side. So we are confident now one point to add regarding the.
Franchisees in also our overall network, we are still at the stage of maintaining the overall stability and profitability of our franchisees the average price.
Boise Geostar delivery fee is still higher that indicates that we have not encroached upon our franchisees a profit.
If it's necessary in the future, where we all need to share a greater burden, we will do so without hesitation.
And I hope this answers your question points.
Okay. Thanks.
Thank you.
Your next question comes from Ronald Jones with Goldman Sachs. Please go ahead.
Thank you, ladies and gentlemen, and Sophie.
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Yeah, great too hard so if I'm in a control.
Tissue.
In the winter when we enter concrete the whole faster than the market and 10 percentage points and this year, we raised that to 15 percentage points and that is to further accelerate our growth to pull away from the rest.
If you indicated and it is.
Advantage for CTO to achieve this goal based on our scale cost and also.
Capital advantage.
Two boxes still for using chairman term, we still have many tools or leverage that we can pull depending on market conditions and also the competitive landscape changes.
The expected range that we have landed with our performances is as we previously planned without.
Significant changes, we will maintain our course maintain our pace and Meanwhile, we will focus on the task at hand, one being raising our last mile couriers earnings to be the highest amount.
The industry.
And then too.
Accelerate our efforts in building our last mile capabilities and these are some of the key.
Areas or initiatives that we will rely on to further pull away from the rest.
The second question relating to.
Can go do it and Bob as.
Statistics.
As of this quarter Alibaba as.
Volume represents 56% of our total amping door it was 20%.
And compared to last year, Alibaba with a 63% in total.
13%.
Sequentially into the increased by two percentage points.
Which is growing much faster of course.
Hello.
Wonderful. Thank you. Thank you very much lydall.
Dental.
Thank you.
Your next question comes from Melissa Chen with China Renaissance. Please go ahead.
Yes.
Hi, Jeff.
Yes.
Yes.
Hi, Eric.
Yes.
Okay.
Yes.
Okay.
Yes.
You'll see that Q4.
Yeah.
Sure.
As usual I will translate for myself.
No further questions follow up on the industry landscape. So im just wondering where we are.
Some merger.
In this sector and the second question is on the cost savings.
Do you see like 60, 65% of our orders already process Scott.
Equipment.
And the 64%.
All forward tracks are already cell phones for cancer Center can you guys talk so I'm wondering what salary cost saving potential, especially in the Q4, when we have their shopping carnivals second Lebanon doubled.
Thank you.
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Well I appreciate the answer.
Ashish.
The.
Chairman indicated that for the first question. The overall trend for the industry is consolidation as you can see from the path CR eight or CRC index has been consistently increasing and even without M&A. There will be consolidation. There has been consolidation in index. In addition.
First tier.
The scale.
Express businesses are also.
Separating into different tiers tier one tier two and perhaps they are tier three in terms of their volume and the distance between those tiers.
On the second question, we will be continuing.
Our effort in.
Our cost productivity going forward.
The cellphone fleet as well as automation art to two of the key areas that we're focusing on now and there are still plenty of room for our investment and also our further productivity gains for example, the smart machinery investment technology in our decision making.
For example, some of the larger sorting equipment have been put in place across our sorting hubs dynamic weighing machine. We also help.
Eliminate manual driven and also labor.
Dependent activities in our production process.
The key though however in the competition or competitive advantage comes from the last mile or the added the two areas that we have discussed one.
In short our pickup and delivery fee schedules in fully implemented so that the last mile occur years will fully.
Benefit from the pickup fee and the difference between the pick of fee and what they have to submit to the the the outlets and that is what we are referring to to have our careers earned the highest in the marketplace in terms their earnings and then too we are in the process and we will continue to invest in the last mile is not only.
Helps provide.
Individualized.
Service to our consumers, but also allow us to reduce costs. All of those are what we have mentioned in earlier discussion and also going forward that will help us provide greater competitive advantage not only in the cost at the platform level, but more.
More so in the last mile.
Melissa.
Okay.
Thank you.
Again, if you have a question. Please press Star then one.
Your next question comes from 10, how with T.H. capital. Please go ahead.
Laser including Sophie.
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Okay.
[laughter] forgot the first question that okay, Glenn duty refund.
And then second question regarding the social our micro merchants and or what are our thoughts around those in how we are approaching that part of the opportunity right.
So the first question the revenues generated by our key accounts in this quarter was about $650 million and accounts for about 4% of our revenue.
And it's up about 60% from the same quarter last year.
And in terms of volume represents about 7% or so of our total volume increase.
About 96% from the same period last year.
If I might add that the K accounts.
Gross margin has increased slightly this quarter by about 50%. So if I may add a little background the pay accounts ours.
Large.
Businesses for example, uniqlo.
We pay in sea trip, they have a higher bargaining power cores and but they also have higher quality of service requirements and those accounts are handled by the headquarters instead of franchisees directly because the volume requirements and also quality of service requirements that could only be better handled by.
Across networks. So we are better at coordinating that.
The second question relating to the small micro businesses that has always been part of our business and we are finding ways to better serve them. One of our system that is so called all analysts is directly addressing those needs.
And the volume has been increasing and.
The second in the previous quarters consistently so what you have observed is correct that there is a right.
Hi.
In this area.
Thank you Kim.
Thank you.
Your next question comes from Jay Long Shi with.
And our anyway. Please go ahead.
Hi.
I think any time for any additional and no one here.
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Good I'm going to do about Jonathan Thanks for taking the top all communities.
Hi, Good morning management, Thanks for taking my questions and I have a follow up question is on the.
On the.
On the e-commerce .
On our relationship with the E Commerce cuff come US first of all I would like to note a price comparison.
For fall for details differentiate your comments customers in particular, I just wonder if the average price.
Charges.
PDP merchants.
If the price is femina.
Similar to or lower than the price deal charges.
Those few more top all merchants and also we know on April one of the reason is that video is strategic.
Investors, So I just wonder if these closer.
Relationship.
The PEO has with the long e-commerce giant may potentially at risk restrict.
Details capability to deepen the business cooperation with the entre ecommerce players.
Thank you.
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So you wouldn't say soil team has had to cope with this lease with holding and we havent assortment to Cook will shoot.
And the price comparisons.
The price is largely driven and determined by the market and CTO.
Is a platform so as highly pipeline teams. Although there are many merchants in many consumers and there are some deviation because of that and not because of that.
Man man made or intervention by any of the platform you are right that Ari Barbara is our investor is our shareholder but it has always been.
Allowing us and which is the right thing to do transact our business based on market practices. Our price is determined on a cost plus minus.
And Ali Baba has never asked us or it will never ask us to differentiate between them or any other of the market players. We are eight open platform. We see everybody has the same and we carry out our business as usual.
Thank you.
Right.
Thank you.
Your next question comes from Jerry 10, with you I B.K. him. Please go ahead.
Good morning.
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A four and five cities.
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Sorry.
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Uh huh.
Yes, it will.
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So we'll kind of year highly pots and some cost of attendance a slew of I know you did just added typically tissue.
Yes, it is our belief that.
It is our belief that e-commerce will continue to grow and about being one of the largest player of course, it will be a major driver for that and on the.
Not only in the first or second tier cities the rural areas, including the.
Villages are presents a great opportunity for express delivery industry, especially for a CTO, we have the widest coverage and deepest penetration across the country our coverage in the villages in there.
Pounds are near 90% so that provides a great opportunity for us to.
Yes benefit from the growth of that trend in the lower tier cities.
The slowing of the.
Commerce in what we've seen from our vantage point is that the E. Commerce will continue to be the main stream, although it may take on different format.
Offline coordination, perhaps and that's what we referred to in our script that we're building our comprehensive capabilities in serving those e-commerce or any of the variations there might be E. Commerce has been the driver for our express delivery business.
Improvements or growth and on the other hand on the flip side.
Express delivery businesses is also providing positive catalyst to commerce growth. So we don't think there is a.
A risk we are seeing more opportunity.
And of course, the requirement is for us to continue to modify if necessary build new capabilities, where needed in order to continue to grow with the market.
Thank you. Thank you.
Thank you.
Your next question comes from Paresh Jain with high HSBC. Please go ahead.
Yes. Thank you operator, and thank you for giving me the opportunity I have two question as one of the question was already on food.
First can you share your view because in 2017, you have been recognized as National High end, New technology enterprise and as a result, we have seen a lower effective tax rate, which is likely to expire by the end of this year.
Do we should we expect a similar sort of extension going into 2020 and onwards.
And my second question is of your total Capex guidance, how much of that goal to sorting center automation and investment and own trucks I recall, you disclosed that in the past, but if you can help me respond, but again that would be very helpful. Thank you.
Thank you for your question.
Yes, we have been recognized as the high New technology company and the cycle is three years. So we are in our third year and based on our current business and also plan on investment on the technology, we will be renewing that qualification so hence to continue to enjoy that.
Matt beneficial tax rate.
Our capex spending largely about 70% goals towards land acquisition and sorting facility development about.
20% around 20% or so will go towards.
Investment into improving our fleet.
Capability.
As well as some of the sorting equipment going forward and the rest will go towards technology and so on so forth.
Okay. Thank you again, just to clarify regarding the pecs tax bracket is it by.
We automated you extend for the next three years or is this something that you will apply and you have already gotten extension for three years.
No. It is not an automatic renewal we will be applying for it and then also on a consistent annual basis, we'll be providing documentation and are also received the necessary inspections from the government on an annual basis. So it is a process we continue to.
Apply.
Perfect. Thank you so much.
Sure. Thank you.
Thank you.
This concludes our question and answer session I would like to turn the call back for any closing remarks.
Thank you everyone for joining our call.
As you know that we've been consistently executing on our strategy and have been.
Thats trading up and our ability to adjust to the market condition changes and as we grow our business. We are also growing our footprint on the environment and we wanted to let everyone know that we have published our first SG report and that is posted on our website.
And that report for 2018 summarize some of the efforts that we have put forward in terms of environments, social and governance.
Welcome everybody to take a look and we will.
Are you seeing you underwrote.
Thank you very much thank you.