ZTO Express (Cayman) Inc. (NYSE:ZTO) Q3 2022 Earnings Conference Call November 21, 2022 7:30 PM ET
Company Participants
Sophie Li – Capital Markets Director
Meisong Lai – Chief Executive Officer
Huiping Yan – Chief Financial Officer
Conference Call Participants
Ronald Keung – Goldman Sachs
Liu Su – Citi
Frank Yip – Daiwa Capital Markets
Thomas Chong – Jefferies
Operator
Good day. And welcome to the ZTO Express Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.
Sophie Li
Thank you, operator. Hello, everyone and thank you for joining us today. The company’s results and an investor relations presentation were released earlier today and are available on the company’s IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer, Mrs. Huiping Yan, Chief Financial Officer.
Mr. Lai will give a brief overview of the company’s business operations and highlights then Miss Yan who will go through the financials and guidance. They both will be available to answer your question 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 1995. Such statements are based on management’s current expectations and current market and operating conditions that 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, performances or achievements to differ materially from those in the forward-looking statements.
Further information regarding these and other risks, uncertainties and factors is included in the company’s filings with the U.S. Securities and Exchange Commission. The Company does not undertake any obligations 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. Meisong Lai. Mr. Lai will breeze through his prepared remarks in its entirety in Chinese before I translate for him into English. Welcome Lai.
Meisong Lai
[Foreign Language]
Hello everyone and thank you for joining us today. For the third quarter of 2022, ZTO delivered a parcel volume of 6.37 billion, which increased 11.7% year-over-year expanding our market share by 1.3 point [ph] to 23.1%. Through customer satisfaction scores hitting new records, and our end to end tap limits and the 72 hour time definitiveness continue to rent top a moment here.
Meanwhile, we achieved RMB1.87 billion of adjusted net income, growing our bottom line by 63.1% year-over-year. In the third quarter, due to pandemic and other external factors, the overall growth rate of the Express industry decelerated. ZTO focused on being the best weakened through wider implementation of detail oriented and data driven process management and solution — not only did we enhance operational excellence, but also build revenues to realize optimistic as well as the – systemic growth financial while ensuring the normalized pandemic prevention and control, we still was able to lean on both volume and price for the third consecutive quarter and further widen the lead over our peers in the market shares serving quality and profitability.
Over the past few quarters, we have achieved remarkable results improving the operational excellence and earnings quality. First of all, by combing through key a customer accounts and modifying or responding network policies we eliminated unnecessary loss making contracts and at the same time enhance the competitiveness of our own lives. Second, with further refinement and wider utilization of our daily volume cost of profit dashboard tools within the visibility at the parcel flow level with a lot of to recalibrate cost of coverage and pricing expectations, therefore reduce growth of policy making.
Third, with further standardization of operating protocols, we find the KPIs and optimizing digitization capabilities. We can now track and analyze trend statements working process by segments, which includes activities. Therefore improve effectiveness of work shifts are designed. We’ve all — it more time to increase utilization of labor facilities and transportation resources, reduce better packages and improve end to end head winds. The overall operational quality and efficiency was intense.
While optimizing our own operations, we continue to focus on empowering our network partners improve their comprehensive capital thus stimulating market share gain. We have gradually extended our volume cost to profits in network partners. With first real time data to always encourage and assist them organized and great financial results help always with low and negative growth to identify and solve problems from bottom up, and ultimately through market competitiveness. We further simplified partner fee policies and make them more equitable, as parents in uniform. We’ve tapped into the incremental market share potential through interest alignment and resource sharing amount pickup and delivery outlets, and effectively increased customer acquisition and total profit at both marketing and fulfillment.
Ensuring the service quality throughout all stages of pick up, quotations, transportation and delivery is a precondition for expanding market share and increasing profits. In the past few quarters, we have continuously refined KPIs and improved the way words and recommend mechanisms and tackled recourse to problems in a timely manner with integrated effort from all key segments of the entire network.
In the third quarter, our leading Cainiao index scores widened among peers with effective [Indiscernible] brand estimation and service representation. Fourth quarter thus far, the external factors including pandemic situations continue to impact consumption level was lower than expectations and craft industry growth was under pressure. However, we have been continually focusing on the following priorities around our primary goal of salaries and market extensions, supported by employing high quality focus.
First of all, strict accountability for operational safety pandemic prevention and control to ensure the smooth flow of packages. Second, we have managed our network infrastructure capability in an orderly manner, particularly helping to always to plan and establish accounts such as delivery teams which are in sync with entire transit and sporting platform.
Third, further implementation of network management tools, including those of last mile policies, which, without compromising the vested interests of the policy owners, restore the — direct access to market pricing, and insights to acquire new retail customers. Fourth, accelerated expansion of quality persons with diversified capabilities at the [Indiscernible] that go beyond reducing pickup and delivery costs and provide community services in addition to on-demand delivery to door therefore enrich last mile customer experiencing for ends to come.
Fifth, designing and the promotion of eco diversified products and services, which rely on our differentiated and scale and of quality events. For example, standard time definite service to meet customer needs. Looking ahead, the growth prospects of financial plus delivery still remains positive. The divergence of key players have gradually become obvious and is clear.
For the past 20 years, we still have food and relied on its shared success culture, innovative DNA, it’s networks with the stability and its unsurpassed scale and efficiency to stand apart from the rest. Coupled with increasing effort on management, upgrade and rigorous work ethics and finances, we are confident to achieve our primary goal of accelerated market share expansion with improving service quality and profitability to usher in daily parcel volume that would exceed 100 million.
Now I’ll pass to our CFO Miss Yan to take us through our financial results.
Huiping Yan
Thank you Chen and Li. And hello to everyone on the call. As I go through our financials please note that unless specifically mentioned, our numbers quoted are in RMB, and percentage changes refer to year-over-year comparisons. Detailed analysis of our financial performance, unit 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 recurrence of pandemic shutdowns or restrictions, and the weaker than expected economic outcome, ZTO delivered strong performances in both market share gain and profit expansion. Both supported by improving quality of services. Parcel volume increased 11.7%, which helped to expand our market share by 1.3 points to reach 22.1%. The adjusted net income grew 63.1% to RMB1.9 billion.
Total revenue increased by 21% to RMB8.9 billion. ASP for the core Express Delivery business increased 9.9% or 12 cents. While pricing became more stabilized, we continue to optimize our policy effectiveness by enhancing volume mix, as well as helping our network partners and outlets to strengthen their competitiveness and profitability.
Total cost of revenue was RMB6.5 billion which increased 11.6%. Overall unit cost of revenue for the core express delivery business increased 12.6% or 1 cent. More specifically, line haul transportation costs per parcel decreased 2.2% to 49 cents, where rising fuel costs are offset by cost efficiency gain from increased use of high capacity trailer trucks, improved lower grade and better route planning. Unit sorting cost increased 5.8% to 30 cents, driven by increased labor costs and higher depreciation and amortization charges. We continue to raise our level of automation in response to increasing human resource costs.
Gross Profit increased 55.9% to RMB2.4 billion benefited from both volume and ASP increases on top of meaningful cost efficiency despite lower than expected volume. Gross Profit Margin rate increased 6.1 point 27.3%. SG&A expenses as a percentage of revenue dropped 0.3 points to 4.9% demonstrating continued scale leveraged by our corporate cost structure.
Income from operations increased 59.9% to RMB2.2 billion and associated margin rate grew 5.9 point to 24.3%. Operating cash flow grew 58% to RMB2.8 billion. Our capital expenditure totaled RMB2.1 billion. We’re hopeful that COVID restrictions would gradually ease off and macroeconomic condition would improve in 2023. We believe that China’s express delivery industry has great potential to grow for the longer term, and ZTO would remain strategic focus on market share gain upon achievement of targeted profit level. All of these will be made possible through continued effort 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 condition, the company revises its previously stated annual guidance. Parcel volume for 2022 is expected to be in the range of RMB24.3 billion to RMB24.7 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 of 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.
Question-And-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ronald Keung with Goldman Sachs. Please go ahead.
Ronald Keung
[Foreign Language]
Meisong Lai
Thank you management just I have two questions. Thank you Ronald for your question. Let me translate 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 the prevention and on the other hand continued growth focused. We believe that after the major Congress meetings, policies will gradual even though it is gradual, but it will certainly come about to stimulate economy and continue to raise consumer’s confidence in supply chain resuming its efficiency as well as logistic businesses, particularly Express businesses.
For next year, we were 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 previously experienced fierce competition is low as everyone starting to focus more gradually on quality of operations. And as well as what we have seen the government’s conviction in regulating competitive environment ensuring healthy competitive dynamics taking place. And the industry growth had slowed down. Yet, the increase in volume in next year will be the target of everybody’s 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 our network partners in that extent that they are ready and they are prepared as well, in seizing the opportunity that will arise.
Overall view is that in general as the policy continues to ease and relax, the economic operations will begin to tend to normal in that sense, then our focus will continue to 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 is clear the stronger will become stronger, and the profit stability will provide even further support for accelerated growth. It will eventually be the winner 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 deserves.
Ronald Keung
Thank you. That’s very useful.
Operator
Our next question will come from Liu Su with Citi. Please go ahead.
Liu Su
[Foreign Language]
The cost of reduction potential if we have any guidance or could give us any color on that. And how should the competitive expansion flare [Ph] being the future to more tailored to better optimize the utilization rates. Thank you.
Meisong Lai
So let me help translate the hike, the oil price hike in the third quarter the impact our total cost per parcel is about 3 cents. As we all know that the domestic oil price increased by about 30% and global prices is somewhere around 25% to 30%. So, we have still a 1 cent improvement on the per parcel 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 rate. Now on the sorting cost per parcel increased 1 cent year-over-year. We have seen lower than expected volume as we have a proportionately higher fixed cost. Specifically we have our own personnel in sorting facilities. So, the scale leverage is diminished in that sense when volume is lower than expectation.
And another factor impacting the sortation costs per parcel is the increased depreciation and amortization from new hubs and new equipment installation into putting in operation. Going forward in the near term, we will and we have seen and we will continue to benefit from our digitization and operational excellence improvement, route planning, shift designing, total end-to-end coordination. All these will help us reduce per unit cost. In a longer term as we have mentioned in in the past, as we achieve our goal of expanding market share more volume coming into our network then we are able to realize even further costs of productivity and efficiencies as our routes become more direct as our number of sortation comes down.
In other words, more and more of the parcel grid a portion of a parcel will only go through sorting once or even zero sorting and that will significantly reduce the per unit cost even further. So I hope these answers your question.
Liu Su
[Foreign Language]
Meisong Lai
As far as capital investment, we will continue to monitor macroeconomic conditions and we will continue to recalibrate our plan of investment. However, we do believe that the peak investment period has been in the past we’ve already gone past that because majority of our sorting hubs and super sorting hubs have been established and the on-going CapEx expenditures with a bigger portion of that would go towards some of those upgrades. Most of our infrastructure constructions are already in place. So we do believe that the CapEx spending will be tapered off or held steady.
Liu Su
[Foreign Language]
Thank you
Meisong Lai
Thank you.
Operator
Our next question will come from Frank Yip with Daiwa Capital Markets. Please go ahead.
Frank Yip
[Foreign Language]
So, let me translate from my question is, I got two questions first related to the pandemic outbreak is that that are given the day to day vertically, pressure volume growth is mainly coming from the pandemic disruption or is mainly related to the consumer expenditure. So, if we excluding for those pandemic disruption for the next year, so, what kind of COVID that we are targeting for And my second question is regarding divergence of profitability amongst peers. So, what is the key reason or the key factors that we have about performance then the artists?
Meisong Lai
[Foreign Language]
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 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 we believe the industry has an opportunity to reach a double digit growth. The reason is that we think first of all, it has a low base. And then two, as we are seeing the country has 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 will gradually ease off some of the restrictions so that the economy will return to normal gradually.
So for our profitability better than all 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 ZTO enjoys. And we have consistently focusing on quality of services, differentiated quality of services, not only at the transit part, but 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 on focus on into an operational efficiencies also helped greatly ensuring our profitability, and certainly we enjoyed better scale leverage than anyone else. Third, which is more important than overarching because it is our primary focus on balancing all three priorities, volume, increase market share gain, profit, expansion, quality of services, and in further we are exercising efforts and discipline not only to balance all three, for ourselves, we are helping our network partners because then they are able to invest alongside of us further their sustainable growth. So we do believe going into a time of rebound and recovery we’re in a much greater position to maintain our lead and in further expand our market presence.
Frank Yip
[Foreign Language]
So my follow up question is can you tell some of the colors regarding to turn dividend partial so what exactly was the partial contribution or developmental contribution right now?
Meisong Lai
[Foreign Language]
Indeed, to diversify our product is one of our initiatives. And we have officially launched the standard express products. The outcry since 2021, which boasts differentiated services in terms of pre delivery, phone call, guarantee timeliness and precision, commitment and last mile customer delivery. It has currently covered most of our major cities, perfect level cities in China, around over 300 plus cities and the pre delivery call certification is over 99% It has we have plugged into the mainstream ordering platform in the marketplace. And we’re also ramping up to the onsite delivery rate to strategic technology adjustment. Our daily volume for this particular product is over 400,000 packages to be and to see customers are all enjoying the product. We have been successfully expanding this protocol or this — this protocol and we are committed to expand these services further across the nation.
Frank Yip
[Foreign Language]
Operator
Our next question will come from Thomas Chong with Jefferies. Please go ahead.
Thomas Chong
[Foreign Language]
Thank you management for taking my questions. My first question is about the e-commerce landscape. Given that we have been seeing a short form video is ramping up very quickly. May I ask management about the partial volume mix among different platforms? And my second question is about investment strategies. Given that we have been seen our peers also investing in overseas and local on demand. Just want to get some color from the management with regard to our investment spending over the next couple of years, given that our profitability is very good. Thank you.
Meisong Lai
Thank you for your question. I’ll take these two questions. We have been — ZTO is a open platform. We serve all types of e-commerce, all forms of those. You’re right that video streaming such as [Indiscernible] and so on so forth. They are all becoming more and more of the mainstream players. In addition to what we have previously seen the tempo and toolbox. 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 up and coming in new form of commerce.
And the second question, investment strategy overseas since in the early years about 10 years ago, we have started looking into Southeast Asia region of investment. However, we have come away with the experience 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, our resource disbursement our resource allocation is according to the size and certainly there are certain countries in the Southeast Asia, their opportunity is similar to perhaps China about 10, 15 years ago, their e-commerce development is also enjoying great upside and room for growth, but yet we have to be very careful because we know network operations we know the partner model yet you have probably observed they are more quality demand, quality 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, in that sense, we also expanded a resource secure procurement in Europe, in Africa, yet the expansion investment for overseas has to be careful has to be systemic. What we have 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. Another part of it is the whole industry is going through recalibration. Cainiao [Ph] being one of the key players have shifted most of its 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 ZTO have always been prudent in its own investment strategy. So, I can tell you recently of certainty that we are going into international investment but we are watching we are observing and finding the right opportunity becomes important for us to allocate our rich resources.
Thomas Chong
Thank you.
Operator
Our last question will come from Frank [Indiscernible]. Please go ahead.
Unidentified Analyst
Probably we miss you, your line might be muted. This concludes our question-and-answer session. I would like to turn the conference back over to Huiping Yan for any closing remarks.
Huiping Yan
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 micro environment continued to improve and we are hopeful the rebound will certainly arrive in due time. Another thing I want to report to you or point out to you that the board has recently approved of an additional 500 million buyback plan for us to ensure our return on interest or return on our shareholders. So I look forward to speaking with you all know in the future. Thanks again for joining us today.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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