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spk01: Good day, and welcome to the ZTO Express, Inc. First Quarter 2021 Conference Call. All participants will be in 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. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. And please note that today's event is being recorded. I would now like to turn the conference over to Ms. Sophie Lee. Ms. Lee, the floor is yours, ma'am.
spk02: 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 are available on the company's IR website at ir.zto.com. On the call today from CTO are Mr. Mason Lai, Chairman and Chief Executive Officer, and Ms. Huiping 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 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 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 update 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.
spk06: last year's growth was 88.5%, and the operating industry's average growth was 13.5%. The market share expanded by 1.5% to 20.4% for the retail industry. As the scale increased, our service quality remained bright. In a year, ZTE achieved a net profit of 7.82 billion yuan after adjustment. the same growth rate of 23.1%. As you know, the industry still maintains a high growth rate, and the competitive attitude continues. In a price-defeating environment, the industry team continues to show a deteriorating performance in terms of profit and loss. While the company is making a positive growth in profits, it is further developing in terms of transfer platform performance, network management optimization, and end-to-end construction. First of all, the transfer platform will further improve its effectiveness. During the transfer period, we will continue to increase our investment in resources and prepare for the rapid expansion of future production capacity. One system capital expenditure of 22.8 billion yuan. We will build a harmonious logistics area around the idea of constructing a comprehensive smart logistics area, and make reasonable and forward-looking plans for three-year production sites, add, improve, and expand, etc. At present, There are dozens of projects in the process. In the transportation section, under the premise of adhering to practicality and cost, we will further optimize the cooperation of free transport and three-way transport, and better play out the performance of free vehicles. Under the help of big data, we will continue to optimize the location of travel and open the road of discovery according to the business needs. Second, the stability of the network. Recently, and the development of the network organization and the ability of the network point. In addition, the number of network points in the whole network remains stable, and the structure is more flat and resilient. On the one hand, we implement network-based management, do well, and do not help, and change, eliminate, and replace, etc. On the other hand, we speed up the promotion of policies, to the end, to the end, to the end, to the end, to the end, to the end, to the end, to the end, to the end, to the end, Our last-mile resource advantage is gradually increasing. As of the end of the first quarter, the total number of shipments is nearly 70,000, which is close to the same level. At present, with the change in consumer acquisition habits, the President has almost half of the package completed by sending by the way of flying above the door, about 90% of which are through shipments. Modern construction has the imagination space for the development of the future. In order to welcome the Japanese opinion, is one of the key tasks that we have been working on since the beginning. As you know, we have handed out a relatively satisfactory result sheet. In the fast-growing main business, in the fast-growing main business track, we are doing a great job in the main business, and while we are doing a good job in managing the business, to double-focus on maximizing the use of SMEs, and to promote the system of generation units, and to build comprehensive logistics service capabilities. Our goal is to develop consumer knowledge with differentiated products and services in the next three to five years, and to promote customers' awareness of SMEs. We believe that the future competition is the competition of the ecosystem, Thank you, Lai Zong. Please let me translate first. Hello, everyone, and thank you for joining us today.
spk02: In the first quarter of 2021, VHL fulfilled services for 4.5 billion parcels. Through our volume 88.5% year-over-year and exceeding the industry average growth rate by 13.5 percentage points. ZTO's market share expanded by 1.5 percentage points to 20.4%, further solidifying our industry leadership. While accelerating scale expansion, we maintained service quality to be among the top ranking. For the first quarter, ZTO achieved an adjusted net profit of $782 million, which increased 23.1% year-over-year. In the first quarter, the industry experienced rapid growth, and the competitive dynamics continued to evolve. In an environment of prolonged price decline, major players of the industry formed diverse profit-level lineups, while positively growing its profits. ZTO has made further strides in improving transit efficiency, optimizing network management, and enhancing last-mile presence. First, efficiency of the sorting and transportation platform were further improved with increased investment in self-owned transit facilities in preparation for capacity demand increase in the future. Capital expenditure in this first quarter was $2.28 billion. We acquired usage rights to suitable logistic land and carried out up to three years forward planning, site modification and extension, aiming to develop smart, comprehensive logistics service park. There are over 10 projects under construction at this time. Full transportation without losing size to timeliness and cost control. We further optimize the balance between self-owned fleet and third-party vehicle usage to better leverage higher operating efficiency by our own vehicles. With the help of technology and data analysis, we continue to enhance existing ROC scheduling and adding new ROCs that are more direct in accordance with demand to recalibrate capacity utilization. For sorting operations, We are continuing to improve coverage and functional efficiency in automation. We implemented sorting center level performance appraisal mechanism to detail manage shift spending and digitize the performance measures to enhance labor productivity. Benefiting from capacity buildup and a wider application of technology solutioning, we combined the sorting and the transportation cost per parcel in the first quarter decreased to 5.2%. despite the absence of benefits from ETC fee waiver policy that lasted from February to May of 2020, which skewed the year-over-year comparison. Secondly, network stability was maintained, which made it possible to promote organizational structure upgrades and capacity development. By the end of the first quarter, the number of outlets in the whole network remained stable with less layering. On one hand, we furthered our great approach of management to empower, assist, rectify, and replace where appropriate. On the other hand, we focused on strengthening direct link to last mile posts and careers, promoted career rights protection, as well as further developed all this processing capability. We believe a stable network is the foundation for brand value recognition and the competitive strength for our outlets. Thanks to a network that is built on fairness and trust, VTO achieved a high performance in various categories of quality measures, including complaint rates, cabinet score, and overall public satisfaction ranking in the first quarter. Thirdly, the last-mile presence development has been accelerated. Advantage of our last mile presence became more apparent. By the end of the first quarter, we owned or operated close to 70,000 last mile posts, far more than our competitors. At present, with the gradual shift in receiving habits, nearly half of VTO's parcels were delivered other than to door, of which approximately 90% were accepted through last mile posts. LACMO posts represent great possibilities for future development of our outlets. In order to handle the daily puzzle volume of 100 million or more, LACMO delivery cost containment, hence outlet viability and pricing power, has become one of our most important focuses. In the first quarter, we delivered a set of relatively satisfactory results. Aside from consistent focuses on execution of our existing strategies for our core express delivery operations, we started to pay added attention to maximizing utilization of our eco resources, as well as effective collaboration among our Z ecosystem businesses, so as to form comprehensive logistic service capabilities. Our goal is to establish differentiated products and services to distinguish ourselves in the mind of our customers and enhance distinctive recognition and awareness of the VTO brand. We firmly believe that competitive advantage is only meaningful at the synergetic level across comprehensive logistics capabilities. Opportunities are beyond our imagination, such as more expensive service categories higher levels of digitized operation and management, brand content enrichment and resource planning and utilization. We will strive forward with stronger commitment and higher confidence, more solid work and perseverance. Together with our network partner, we will maintain positive momentum and create a brighter future. Thank you for trusting and supporting us. Now, please allow me again to take us through ZTO's financial results.
spk03: Thank you, Chairman Lai. Thank you, Sophie. And hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in R&D. These 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 key highlights here. In the first quarter, thanks to steady economic recovery and firm implementation of our consistent strategies, CTO grew hassle volume by 88.5% to 4.5 billion, outperforming the industry average by 13.5 points. Our leading market share further expanded 1.5 points to 20.4%. Total revenue increased 65.3% to 6.5 billion. ASP for the core express delivery business declined by 12.4% or 18 cents. This is the least amount of drop compared to industry peers, yet we have achieved the most market share gain. The 18 cents price decline consisted of approximately nine cents volume incentives used to support our network partners to grow market share and maintain confidence as well as keep the network stable at the same time. There are seven cents decline associated with parcel weight drop. Average weight per parcel declined about 10% to approximately 1.04 kilos. And then there's two cents decline due to increased use of lower-priced e-way bill, yet it is more environmentally friendly because it's a single sheet. The total cost of revenue increased 73.6% to $5.4 billion. Overall unit cost of revenue for the Core Express delivery business decreased 6.7% for $0.08 generally benefited from economies of scale. And more specifically, unit transportation costs increased 3.6% or two cents, mainly due to a combined effect of increased use of more cost-efficiently run self-owned high-capacity freighter trucks and the absence of favorable ETC toll waiver policy that lasted from February through May last year. Unit sorting costs declined by 17%, or $0.07, because of higher level of automation. Gross profit increased 33.9% to $1.1 billion. Gross profit margin rate decreased four points to 16.9%, which resulted mainly from competitive-led ASP decline and per parcel weight declines. than partially offset by scale leverage and cost productivity gain. SG&A, excluding share-based compensation, or SBC, increased 25.8% to $372 million, mainly due to increased salaries, headquarter facility expenses, and depreciation and amortization expense. SG&A cost as a percentage of revenue decreased 1.8 points to 5.8. 8% given our lean corporate support structure. Income from operations increased 70.1%. Excluding SBC, income from operations increased 38.5% to $881 million. Associated margin rate declined 2.6 points, which is narrower than the gross margin decline because the positive SG&A leverage and increased other operating income, mainly VAT super deduction and government subsidies. Adjusted net income increased 23.1% to $782 million. Net income margin rate declined 4.1 points to 12.1%. Operating cash flow increased 168.3% to $477 million. CapEx increased 31.3% to 2.3 billion as we focus more on building comprehensive logistics services capabilities. As we further strengthen our infrastructure in preparation for increasing demand for the core express delivery businesses, as well as resource planning for development of our ecosystem, our annual CapEx would remain at a higher level for the whole year to be around 11 to 13 billion. Turning to business outlook. Based on current market condition and operational results, we maintain our annual volume guidance of 35% to 40% year-over-year growth. Our annual parcel volume is estimated to be in the range of $22.95 billion to $23.8 billion. Such estimates represent management current and preliminary view and are subject to change. This concludes our prepared remarks. Operator, please open the line for questions. Thank you. Yes, ma'am.
spk01: We will now begin the question and answer session. To ask a question, you may press star, then one on a touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you'd like to withdraw your question, please press star then two. As a courtesy, we please ask that you limit yourself to two questions. Again, it is star then one to ask a question. At this time, we will just pause momentarily to assume our roster. And the first question we have will come from Thomas Chung of Jefferies.
spk04: Good morning. Thank you, Manager Cheng, for accepting my question. I also congratulate you for such a good performance. My question is mainly to ask you about this competition pattern. How do we see the entire industry's competitive environment in the next one or two years? Especially from the aspect of ASP and cost per parcel, Thanks management for taking my questions and congratulations on a very solid set of results. My question is about the competitive landscape. Given that the market is getting more intense in terms of the price war, I just want to get a sense about how we should think about the trend of the ASP as well as our strength in operational efficiencies and how we think about the unit cost proposal going forward. And on that front, Can management also share our target on the market share in the next one to two years? I just want to get a sense if there's any chance that we can come in better than previous expectations. Thank you.
spk06: We are still full of confidence in the future of China Express. The entire industry will continue to grow at medium and high speed. We are fully convinced of this. In general, the competition for express delivery is a competition for efficiency. Whether a high-end enterprise can provide better services. The first is to maintain the balance between market share, profit and loss. In other words, in order to ensure profit and loss, we should try to maintain more market share. In the current industry, we believe that your ability to build is very important. In the past few years, we have been focusing on the construction of this ability. In the future, we will also increase the construction of our own transportation ability, and at the same time, help our stations to build the construction of our own ability. We believe that in the future of this industry, the market share will definitely be more and more concentrated, with a scale that is obviously efficient, cost-efficient, and high-quality. It must be able to to obtain more market share. Our goal is to obtain more market share based on the growth of the industry, while maintaining a certain profit and maintaining our profit and loss capability and services. This is what the establishment means. From the current situation, Thank you for your question, Thomas. Operator, please allow me to translate for Chairman. Thank you.
spk03: Thank you, Thomas. In the future, one or two years, the question is about the business trend and the direction as well as ASP and cost per parcel. So I will translate as well as supplement answers for your question. First of all, our confidence remains on the growth prospects of Chinese economy and as well as the industry growth for express delivery. The Next one to two years growth will remain mid to high, high to mid level of growth for the next two years for sure. And this is with high confidence that we have provided this outlook. With regards to competition, express delivery, the essence of it in terms of competition is about scale and efficiency in terms providing better quality of services. ZTO has been in the past consistently focusing on maintaining high level of quality of services, targeted profitability, while focusing on gaining market share. And this will not change for the near term. Infrastructure construction is very important. The strength of the network stability as well as the network partners trust and confidence in the brand. will ensure our strategy's consistent execution. As you have observed, those with scale, with operational efficiency, as well as better quality of services, are gaining market share, are achieving balanced growth. CTO's goal is to focus on our growth rate, higher than the industry, and our profit expansion healthier. Today, we look at our very stable network base. With that, our confidence remains for our steady growth, our market share. ASP, we believe competition is still there as market dynamics continue to evolve. Cost per parcel. is within our own control. And we have implemented, as I previously described, many initiatives for near-term as well as longer-term productivity gain as volume continue to increase. So we are confident in maintaining our goal to achieve market share expansion as well as delivering healthy bottom line while maintaining good quality of services to our consumers and customers. Thank you. Thank you.
spk01: And next we will have Ronald Kung of Goldman Sachs.
spk05: Thank you. 那我想问两个提问吧。 第一就是想听一下我们对这个竞争情况, 那尤其是这个G2在过去一年增长非常的迅猛, 那想听一下我们对整个竞争格局怎么看, 就到底是不是用钱能消出来, 还是我们对刚才说的scale efficiency对我们, uh uh Thank you. I just want to ask on two questions versus on the competitive landscape again. Just how do we see new entrants like J&T, given that they have grown very significantly over the past year? Is this industry prone to just players that could have burned money through to grow and scale? And are we very confident with our leading position that even through cash burning, those players will not impact our very solid scale and efficiency in our number one position here? And then a follow-up on that is recently there has been regulations on the Yiwu pricing. setting a floor on pricing levels. How do we see this trend ahead? Will more governments and staples bureaus, local, also push through more of these? And how do we see these regulations could have any impact or benefit to our business? Thank you.
spk06: Thank you for your question. The express delivery system is made up of four parts. Actually, the ability to build is very important. The usual strategy of the central government is that we think that the express delivery, the cost efficiency, the scale efficiency, determine your competitive advantage. So today, for example, you just talked about, for example, the new entrants, will it affect the competition? I personally think that for the time being, this is a bit of a shock. But in the long run, a courier business must be determined by its ability. Is your transfer capability strong enough? Your reception, your staff, our president said that it is to help our business owners to have a higher income than their peers. As long as our reception is stable, our transfer capability can be enhanced. We look at the past, last year and the year before, the share price of the second and third-tier couriers was low. In the future, it will be a head-to-head competition. In fact, where is your competitive advantage? A company's scale is big enough, its competitive advantage is obvious enough, it will definitely get more market share. We have reached 30 million orders. Today, the leading enterprise has a scale of 30 million to 60 million orders. The enterprise with 30 million orders does not have a profit-making ratio. The capital is not very profitable. At the same time, we have used a lot of third-party resources. then its cost will definitely be higher. So we believe that in the long term, it must be a very obvious industry that your internal trade is good and your cost efficiency is good. It will acquire more and more market share. So in this respect, we are still very firm in our judgment on the Middle East. It is also necessary to have the ability The second question is about government supervision. In fact, we think this is a very good thing. First, if the express service is provided at a low cost, it will directly affect the express service providers, such as our stop, Jiamengshan, and express service providers. At the same time, service quality is also difficult to guarantee. In fact, it is lower than the cost. In addition, we now have more than 4 million courier staff, and we need to add more than 200,000 people every year. If the government continues to monitor the market and restore positive competition, we can effectively guarantee the rights of courier staff, and at the same time, we can promote industry health and high-quality development. Actually, this is a balance. Not to say that today, the more Chinese couriers, the more this plate can hold. Our head Baxia business has gained more than 80% of the market share. But it's not getting better and better. If the Chinese government gives you one or two orders today, you can't hold it. So maintaining a positive market competition is very good for the entire industry. This time, Zhejiang... The law prohibits low-cost express services. Express services will be reduced in this competitive area. The price difference will be reduced. In other words, it cannot be lower than the cost. The market will pay more attention to service quality, network stability, infrastructure capabilities, and construction capabilities. And our central government has a clear advantage in this regard. At the same time, the regulations also point out that the e-commerce platform must not stop the delivery service of express delivery operators. The platform must be fair and competitive. It must not be designated or forbidden to enter any enterprise. This also provides a guarantee for the competitive environment of the industry. We believe that the positive development of the entire industry
spk03: Thank you, Ronald, for your question. We have consistently believed that scale and efficiency and cost are the key competitive factors to ensure sustainability or continued growth. There are four specific segments for a package to travel from end to end, pickup, transit, sorting, delivery. The infrastructure as well as scale and cost efficiency is the determining factor for competitive edge. entered into the market with significant capital, and yes, it is indeed a cash-burning model as of now. Temporarily, it does create an impact to the entire industry. However, we want to point out that if you look into the past in the industry growth, the smaller ones or those without its own sustained capabilities are all gradually exited, have all gradually exited the scene. Future competition starting today or starting the near past has been the scale and cost efficiency in that area. With the top players, about eight of them representing over 80% of the market, their volume are in the range of 30 million to 60 million per day. For those that are running at 30 million per day, their profitability is very much under pressure already. So for a model that largely rely on third party resources where cost and efficiency are less under their own control. This model, I believe, is not sustained. So our assessment is that in the longer term, you must combine capital that is deployed towards infrastructure establishment or development that could allow a model to continue to sustain, continue to grow. And on your second question, the recent IWU policies issued by the government, our view is that if courier operators providing services that are below cost for a prolonged period The revenue of all the players will be largely suppressed, and it's hard to guarantee quality of services. Currently, there are over 4 million career staff nationwide, and with an addition of approximately 200,000 each year. When government carries out focus and attention in supervising the market to restore healthy competition. We are welcoming that and we support that action. It will not only ensure healthy competition, but more importantly, as we always have been focusing on, in ensuring the last mile couriers for those who are small entrepreneurs to achieve healthy and high quality of growth. This regulation issued recently also specifically prohibits price that is below cost. And then that helps narrow the gap between all different players, especially during those competitive regions where production output are more concentrated. So this will allow all the enterprises or businesses to focus more on service quality, network stability, and infrastructure development instead of short-term, near-term price-driven market share gain. In addition, if we may add, the policy also specifically addressed e-commerce platforms some of the actions or practices that are restricting or in designation of specific courier operators, prohibiting monopolized operations, these are all very positive. So it adds to our further confidence in a improving, healthy, competitive environment for us to compete. for the future.
spk05: Thank you so much, Lai Zong, Yan Zong.
spk01: And next we have Tian Hao of TH Capital.
spk00: Lai Zong, Yan Zong, good morning. I have a few questions, maybe a little more, so let's move on. The first one is, I recently saw some discussions about Meituan. Speaking of these laborers, he is not a member of Meituan. Those who deliver take-outs, he also talked about some of their social welfare issues, such as insurance and so on. So I was thinking, because we are a family model, we also have a lot of people wearing Zhongtong's clothing to make Zhongtong the last basket, the delivery of these parcels. I just think in this respect, Will there be any uncertainty in terms of cost? This is one question. I've asked all the questions. The second question is, although the government has set the price, we know that the government's price will not affect the competition itself too much. So we already have an expectation for the future, that is, the number of ships. As for the income of the US ship, Mr. Lai and Mr. Yan, what do you think will be the trend in the coming few seasons? The first question is related to those freelancer, you know, deliver guys. There are some issues regarding their insurance and the warfare. What is the company's thoughts in this regard? That's number one. Number two, what's the outlook for the per parcel revenue in the next several quarters from current competition point of view? The third question is related to the new business development. One is time-sensitive parcels, and the one is co-chain logistics. In these two fronts, what is the current development? What is our look for the rest of the year? Thank you.
spk06: Thank you for your question. Regarding the issue of social security, the courier is an important component of our industry. As you all know, Zhongpeng is the mother of partners. If our platform can fully guarantee the revenue of the couriers, In fact, it will affect the stability and service quality of the end-of-year benefits. The government's report this year also mentions flexible employment. Participating in the social security festival will open the four days of the Shanghai Security Day. The standardization of end-of-year employment and the improvement of service quality are very important to us, the President. In this respect, In recent years, we have also taken some measures to ensure that our senior employees' income will continue to increase, so that they can increase their income to the level of their loved ones. The first is to actively promote the blockchain project. The headquarters and couriers are also directly linked to increase the cost of sending money. Recently, we have developed a foundation for the cost of sending money in the future. Second, this year, we have launched a small-competition insurance program, and we are investing in it. The third one is that we continue to strengthen the work that goes back and forth.
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