This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Hello and welcome to the ZTO Express conference call to announce fourth quarter and fiscal year 2020 financial results. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's 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 Lee, Director of Investor Relations, with Mei-Sung Lay, Director and CEO, and Hui-Ping Yan, CFO. Please go ahead.
spk02: Thank you, operator. Hello, everyone, and thank you for joining us today. The company's results and the 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 ZTOR, Mr. Mason Lai, Chairman and the Chief Executive Officer, and Ms. Wei-Ping Yan, 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 guidance. They will 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 1995. Such statements are based on management's current expectations and current market and operating conditions. They relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control. which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statement. 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. The company does not undertake any obligation to upload any forward-looking statement as a result of new information, future events, or otherwise, except as required under law. It is now my pleasure to introduce Mr. Mason Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English.
spk04: 2020 is a very unusual year. The President has adhered to the concept of sharing with each other, and through the large coverage and penetration of high-end brands, the scale and capacity of leading industries, and the continuous improvement of operational efficiency, the network research partners of Tongzhou, Gongzhi, and Gaoxiao, in the year of the COVID-19 pandemic, the growth of industries, and the increase in price competition, Our service quality level is still at the forefront of the industry. After the adjustment of 45.9 billion yuan last year, the net profit fully reflects ZTE's excellent profit level. ZTE continues to adhere to business growth, accelerate market share expansion, and balance the balance of service quality and profit. This is effective. First of all, we focused on the construction of platform capabilities. On the other hand, we have constructed a larger area of land and land to deploy comprehensive smart logistics, plan the smart operation center and interoperability of ecological integration, while improving the utilization of automated coverage, consider the operation of interoperability in the production area and the operation of different transport systems. We have expanded the size of free vehicles and increased the proportion of high transport and car heads to carriages. We have also optimized the configuration of three-way traffic and free transport. On the other hand, we continue to advance the construction of technological information-based power. In addition to optimizing the existing information systems such as Zangzhongtong, Shenzhou, Xinhe and Xiaomeifeng, We are also experiencing new breakthroughs in the process of user experience, product innovation, and ecological renewable energy. Thanks to the continuous ability to build, refined control, scale efficiency, and good policy during the pandemic, our single-vote division and supply costs have decreased by 4.3% throughout the year, and the cost-effectiveness has increased further. Second, we have continuously expanded the construction of two-sale delivery, while focusing on platform operation scale and efficiency, and strengthening the work of end-of-sale production and quality management. On the one hand, through financial, technology, and management, we have been able to meet the bottlenecks of bottlenecks and challenges in business management. The two-sale foundation's financial strength is reasonable to match the network policy and compete in market competition with joint partners. On the other hand, serious problems such as negative growth or continuous low growth, unbalanced service quality, and so on, will be improved through network management system and problem solving. Third, we continue to speed up the deployment and construction of Modan. Since the beginning of 2018, Modan has gradually shown its advantage. In fact, at the end of 2020, there were more than 68,000 stores in Modan. The size and quantity are leading in the industry. The non-top-down and one-stop delivery method of Modan is not only effective in relieving the pressure on the number of customers and the pressure on the cost, but also provides a competitive space for the front-end market customers. At the same time, the Chinese Communist Party has used the new business model and Internet thinking, broadening supply chain and sales logic experience. At the end of the last mile, the Chinese Communist Party's connection with consumers has been strengthened. As the year of the opening of the 14-5 plan, 2021 will be an important year for the Chinese Communist Party to strengthen brand construction, expansion and promotion services and products, and continue to strengthen the deployment of ecological systems. At the same time, we will continue to advance the key points of global work, and will continue to develop in the following aspects. First, respond to national calls, emphasize the continuity of development, widen the path of historical operation, and serve the poor and the poor. For example, in fast-packaging history, the use of new energy vehicles has increased significantly. We look forward to the development of express delivery. The main focus of our current business is to maximize the market share. We need to expand our knowledge and investment, not only to expand the size of express delivery and increase the efficiency of transportation, but also to quickly improve and grow our ecological capacity. Third, we will deepen the network management work of the two-handed network management to ensure the stable connection between the search engine and the platform. The closer the price competition to the end, the more advantageous it will be. We will promote the flexible and flexible network policy policy to actively grasp the market opportunities and challenges. Fourth, we will accelerate the Thank you. The role of the director-in-chief of the central office is down to the bottom. The multi-channel acceleration helps to cultivate talents. Through more effective assessment mechanisms, the value innovation and digital operation and construction of technological intermediaries, strengthen the process management, and assess the stock, it will be a great success. Thank you very much. We believe that international, fast transport, cloud storage, finance, and other eco-businesses, we can maximize the use of the resources in our hands to provide customers with differentiated and personalized services and products, while also bringing benefits to our investors and partners. In the context of global epidemic prevention and control, more and more consumer products including brands, has accelerated the supply and demand of online and offline products. Online shopping groups, including product categories, have increased and declined. Digital economy is a hot topic on the platform. On the contrary, the concentration of the fast-food industry and the diversification of the head-to-head business are hotly debated in the competition. In 2020, nearly one-fourth of the The express delivery industry has shown unprecedented explosiveness. At that time, for China, we will pay more attention to the long-running resilience and endurance. We are only 18 years old. No one can predict the future of the market. We can take the initiative to control the correct development direction and path of self-awareness, 我们的新征程永远持于脚下。 感谢各位的信赖和支持。 谢谢。 Thank you, Liza. Now please let me translate first. Hello everyone and thank you for joining us today.
spk02: The year of 2020 represented another milestone in BTO's development. we maintained our lead in overall customer satisfaction and grew annual parcel volume by 40.3% over last year to exceed 17 billion, expanding our number one market share to 20.4%. 2020 was also an extraordinary year. We remained true to our shared success philosophy, leveraging on our extensive coverage and brand recognition, leading scale and capacity, continuously improving operational efficiency, and trusted and collaborative network partners. We maintain top-ranked service quality while growing volume rapidly. Amidst the heartblow of pandemic, frequent changes in industry dynamics, and a serious price competition, we recorded $4.59 billion of adjusted net profit, demonstrating a highly differentiated quality of earnings compared to our market peers. ZTO's consistent strategy to accelerate parcel volume acquisition and expand market share while balancing service quality and profitability has been proven effective. First, we focused on building transit capabilities. On one hand, we acquired relatively larger tracts of land for constructing comprehensive smart logistic parks with integrated operations such as in-warehouse processing logistic fulfillment. while enhancing the level of automation and its utilization. We are designing sets that are suitable for coordinated yet varied operational flows. We have increased the proportion of self-owned fleet, including high-capacity trailer trucks, and improved the engine-to-trailer ratio. We also better optimize the use of third-party logistics to supplement our own fleet. On the other hand, we continue to enhance the development of IT technology platforms. In addition to the dramatic upgrades of our existing operating modules such as Zhang Zhongtong, Shenzhou, Galaxy, and BVB, we achieved the new breakthroughs in areas such as user interface, process streamlining, new product innovation, and ecosystem value proposition. With consistent capacity development, refined process management, economies of scale, and favorable ETC policies during the pandemic, the combined sorting and transportation cost per parcel decreased 14.3% year-over-year. Secondly, we continued to expand development on pickup and delivery and strengthened our last mile capacity and service quality. while focusing on scale and efficiency of transit and sorting centers. On one hand, by providing financing, technology support, and operational know-how, we helped our network partners who reached the capacity bottleneck or faced challenges in managerial capabilities Given the strength of the group, we are able to modify subsidy policies frequently and appropriately to help coping with highly competitive and consistently changing market conditions. On the other hand, for those with stagnant and negative growth or weak quality performances, we deployed a grid-based attention approach, which sends quartermaster to locally address problems and implement improvement plans. Thirdly, we accelerated last mile development. Since the beginning in 2018, VTO's last mile presence has been increasingly enhanced. By the end of 2020, we have more than 68,000 last mile posts leading the industry. Last mile delivery methods other than door-to-door, such as the last mile posts, have not only effectively reduced the handling load and the cost of pressure, but also provided room for front-end customer acquisition. Meanwhile, the proactive trial and adaptation of the Express Plus model provided valuable experience in supply chain approach based on IoT mindset, thereby strengthening connectiveness with our last-mile consumers. As the commencement year of the 15th five-year plan, 2021 will also be an important year for ZTO to build brand value and recognition, extend and upgrade its services and products, and establish collaborative ecosystems. While carrying forward our current initiative, we will focus on the following aspects. First, to ensure sustainable growth. we shall take on corporate social responsibilities, including operating in an environmental-friendly way and helping farmers and alleviating poverty. Our efforts are underway, such as use green packaging, operate vehicles that run on renewable energy, bring services to villages and the rural workshops, offer logistic solutions to help revitalizing rural economies, and provide basic care for grassroots workers. Secondly, we are optimistic on the growth prospects of the express delivery industry in China. Our top priorities are to solidify our leading position in parcel volume and further expand our market share. We will increase investments in infrastructure, not only for the expansion of our core express delivery business and the improvement of our transit efficiency, but also for organic yet rapidly developing eco-advantages. We will attach eco-importance to assist and reforming our network partner management to ensure a cohesive match of capabilities between pickup, delivery, and the transit operation. Price competition is likely to remain or even become more intense as it draws closer to an end. we will take responsive and flexible approach to policymaking to effect active control on risks and opportunities. We will accelerate the expansion of our last mile lockbox and post facilities for Express packages. Coupled with our increasing parcel volume, we aim to enhance our pickup delivery capability and manage cost. Through an Express Plus model with openness to all, We strive to seize opportunities under the emerging commerce development to establish stronger connection with our customers in the last mile. Adhering to our principle of shared success, we seek to inspire and enroll our loyal network partners to invest in the last mile opportunities and create long-term value that are win-win. Last but not least, We will optimize our organizational structure and upgrade talent strategies. We have implemented an accountability system at the provincial and assorting center level where rights and responsibilities are assigned to the frontliners. We are developing future leaders through multiple pipelines. With the survival of the fittest approach to performance evaluation backed by innovative technology tools. we seek to establish a culture of management that relies on a digitized process in managing performance of people to dive results. During the Chinese New Year holidays, CTO implemented an uninterrupted service initiative. With more than 97% of our direct network partners and tens of thousands of drivers, operators, and carriers, we meant on their posts handling 140 million parcels for customers across the nation. VTO Blue will sing anywhere. We deliver not only daily necessities, but also happiness and warmth to our customers. Our brand building will root deeper with our differentiated products and services, allowing our customers to truly experience the difference and form unique recognition at heart. The recent launch of our integrated coaching and time-definite service network was a giant leap in our five-year plan of brand building strategy. We believe that our ecological deployment and the collaborative development will enable us to maximize the utilization of scarce resources we possess to provide appreciated and personalized services and products to our customers. and create compounded return for our partners and investors. As preventative measures became normalized before the COVID-19 pandemic, more and more consumer categories, including name brands, are establishing greater online and offline presence. The online categories of food sold and the internet shoppers demographic are expanding and shifting to more diverse economic regions. Contrast to more dispersing or fragmenting digital sales channels, Express Delivery Industry has become more and more concentrated, and the leading group of players are also polarizing into stronger and weaker packs. Almost a quarter of 2021 has passed, and Express Delivery Industry experienced unprecedented growth so far into the year. For CTO, we focus more on a marathoner's seminar. We are merely 18 years old, while no one can predict precisely how the future will unfold. We can, however, think clearly of what we want and when, what trends we have to rely on, and what direction and path we shall take. Journey begins beneath our feet and we are on our way. Thank you all for your trust and support. Now, please allow Ms. Yen to take us through ZTO's financial results.
spk01: Thank you, Chairman. Thank you, Sophie. Hello to everyone on the call. As I go through our financials, please know that unless specifically mentioned, all numbers quoted are in RMB and percentage changes refer to year-over-year. Detailed analysis of our financial performances, unit economics, and cash flow are posted on our website. And here I will go through some of the key highlights. Driven by a strong consumption demand post-pandemic and our sound execution of strategies, we exceeded the high end of our volume target range by growing parcel volume 40.3% to over 17 billion of parcel for the year. The 4.9 billion incremental parcels in 2020 is industry number one and is greater than the total parcel volume we achieved for the entire year of 2016. Our leading market share further expanded by 1.3 points to 20.4%. The revenue increased 20.6% to 8.3 billion for fourth quarter and increased 14% to 25.2 billion for the year. Annual SP for the Core Express delivery business declined by 20.1% for Q4 and declined by 20.2% for the year, which is moderate compared with industry peers. The price decline resulted from, one, volume incentives to support our network partners to grow market share while maintaining confidence and keeping the network stable. Two, increased use of lower-priced single-sheet digital weight bills and three parcel weight drop of 8% to 1.05 kilo for the year or 1.06 kilo for the quarter. Total cost of revenue increased 31.9% for Q4 and increased 25.1% for the year. Unit cost of revenue for the core business decreased by 12.1% for Q4 and 11.8% for the year. Unit transportation costs declined by 15.7% for fourth quarter and declined by 17% for the year, primarily due to increased use of self-owned high-capacity trailer trucks. We also benefited from the favorable total waiver policy from mid-February to early May, and also the decline in diesel prices. Unit sorting costs decreased by 12.4% for Q4 and 9.4% for the year as a result of higher level of automation and improved economy of scale. Gross profit decreased 6.9% for Q4 and 11.8% for the year. Gross profit margin decreased 6.6 points to 22.5% for Q4 and decreased 6.8 points to 23.1% for the year, which resulted mainly from competition-led ASP decline partially offset by cost productivity gain. SG&A, excluding SBC, increased 9.5% to $418 million for Q4 and increased 13.8% to $1.4 billion for the year mainly due to increased salaries, headquarter facility expenses, and depreciation and amortization expenses. SG&A cost as a percentage of revenue remained low at 5.1% for Q4 and 5.6% for the year. Our corporate cost structure remained stable. Income from operations excluding SBC decreased by 13.9% for Q4 and 13.2% for the year. Associated margin decline, 7.6 points for Q4 and 6.2 points for the year, which is narrower than the gross profit margin decline because of positive SG&A leverage and increased other operating income, namely VAT super deduction, government subsidies, and tax rebate. Due to the depreciation of onshore U.S. dollar denominated bank deposits against RMB, the company incurred a foreign currency exchange loss of $82 million for Q4 and $127 million for the year. Operating cash flow was $2 billion for Q4 and $5 billion for the year, decreasing 9.7% and 21.5% respectively. CapEx increased by 68.9% for Q4 and by 76.2% for the year as we secured larger tracts of land for developing comprehensive logistics facilities, purchased more self-owned vehicles, and installed more automated equipment. As we further strengthen our infrastructure to support accelerated volume growth for the core express business, as well as resource planning and development of our ecosystem, Our annual CapEx plan would remain at a similar or a slightly higher level for 2020. The company announced a 25 cents U.S. dollar dividend for the year for shareholders on record as of April the 8th, 2021, representing a 30% dividend payout ratio, similar to previous years. Turning to our business outlooks, As COVID-19 has been largely contained in China, we are confident to achieve our prioritized goal to accelerate market share gain. Considering the current market condition, the company expects the parcel volume of 2021 to be in the range of 23 billion to 23.8 billion, representing a 35% to 40% year-over-year increase. We are not providing earnings guidance given careful considerations for the level of uncertainties and the competitive dynamics in the marketplace. More importantly, volume growth and accelerating market share gain weighs much higher as we continue to maintain high level of quality of services and achieve appropriate level of earnings accordingly relative to our competitive peers. Our track record has provided clear evidence that our earnings quality is among the top of the industry. The above estimates represented management's current preliminary view and are subject to change. This concludes our prepared remarks. Operator, please open the line for questions. Thank you.
spk00: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We ask that participants limit themselves to two questions per person. Your first question comes from Thomas Chong from Jefferies. Please go ahead.
spk03: Hi, good morning. Thanks management for taking my questions and congratulations on a solid set of results. My question is about the competitive landscape in 2021. Should we expect the landscape to be more moderate compared to last year? And on that front, how should we think about the ASP as well as the cost per parcel trend in coming quarters. And my second question is about the various initiatives that we may potentially pursue. In particular, any thoughts about the delivery in a community group purchase? Thank you. Thank you for accepting my question. My question is about the competitive structure of the entire industry in 2021. I would like to ask Mr. Guan, if you look at this year's comparison with last year's, is it different? The second question is, I see that the entire industry is looking at different new businesses. Thank you for your question. The competition pattern is something that everyone is concerned about.
spk04: In the past year, we have seen that the pattern has been diversified. In fact, the second wave of the second wave of the second wave of the second wave of the second wave of the second wave of the second wave of the second wave of the second wave of the second wave of the second wave Thank you very much. In the past year, our capital investment has also reached a historical high of more than 9.2 billion yuan. So in the next few years, we will continue to invest heavily in infrastructure construction, and we will make a difference in the performance and quality of operations. Secondly, in terms of ability construction, to help him improve his ability to build. At the same time, in terms of operation, we pay more attention to the improvement of the internal motivation of the end-of-the-year construction and the staff. In terms of competition, our own judgment will be more and more clear. In fact, the head company with a strong profit and loss ability, with a stable foundation, will have more and more uh uh
Disclaimer