ZTO Express (Cayman) Inc.

Good day and welcome to ZTO Express to announce third quarter 2024 financial results conference call. 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. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Sophie Lee. Please go ahead.

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 CTO are Mr. Mason Lai, Chairman and Chief Executive Officer, and Mrs. Hui-Ping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, followed by Mrs. 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. A 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.

The total business volume reached 87.2 billion units, which is 15.9% of the total growth. At the same time, we achieved 23.9 billion yuan of adjustment and net profit. Zontong insists on high-quality development. In the beginning of the year, we clearly accelerated the creation of differentiated products and services, and increased the recognition of brands and the establishment of new clients. Thank you very much. The optimization of the income system effectively relieves the pressure of the single-voting price competition. Combined with the good continuous operating cost-effectiveness and stable management cost-effectiveness, the single-voting business profit has further expanded the leading advantage. In the third system, the express delivery industry has maintained a high growth. The business volume has increased by 20.1%. We believe that the price of three consumers is sensitive to the institutional characteristics and trends of low-price consumption. The overall high-quality sustainable development of the fast food industry will come from the uncertainty and sustainability of the Hong Kong economy. The subject in front of us is how to balance better in the current market environment, the core values such as service quality, scale, business profit, and co-operative partnership, and resource allocation. Maintaining and expanding the leading competitive advantage is a key element of our high-volume and high-quality development. This is an integral part of the research culture to find problems and solve problems. We have reviewed the work of several systems in the past, especially in the division of labor systems in the headquarters, market trends, and payment policies. The accuracy and effectiveness of the increase of energy, as well as the general fairness of the network policy, have dug into the space for future management and execution that can be improved. The key points are, first of all, to solve the network policy, Three, optimize and implement. 4. Increase the deployment of the information technology system in Modan. Use the content of the business of the living home to serve the local living environment. At the same time as reducing the cost of mortgages, the link between the consumer and the customer is deepened and the main business is restored. By using financial technology tools such as payment and payment, it is more effective and increases the response speed and ability of mortgages to increase the effect of mortgages collection. 6. while continuing to generate profits, systemically paying attention to the investment in the asset market and the momentum of the market and energy reserves, and improving the science of maximizing resources. The development of the express delivery industry for more than 30 years has historically shown that economic development has a strong demand for express delivery logistics. As the industry grows, the concentration of quantity and distribution of goods continue to change. After the economic crisis, we will definitely face different competitive pressures. Since the establishment of the central bank, every challenge is the motivation for our transformation and progress. As the core of the industry, the stability of the central bank network service, the scale of the physical capacity, the ability to generate and reserve funds, and the ability to manage and upgrade are our core competitiveness. From our own point of view, We will continue to maintain the priority of service quality, accelerate the expansion of the scale advantage, and ensure the reasonable stability of the profit and loss level. As a partner, we will continue to strengthen the scale and delicate effect of the MoDang network, and increase the revenue of Jiameng Mountain and Quai Di Xiao Ge. These are all the main factors to achieve the professional mission,

Thank you, Chairman. Please let me translate first. Hello, everyone. Thank you all for joining today's conference call. In the third quarter of 2024, ZTO continued to maintain its leading service quality in last year. Our total parcel volume reached $8.72 billion. representing a 15.9% year-over-year growth. Meanwhile, we achieved adjusted net profit of $2.39 billion, and our profitability remains ahead of our comparable peers. ZTO adheres to high-quality development And we set a strategic direction at the beginning of the year to accelerate establishment of differentiation in products and services while enhancing brand awareness and recognition. In this quarter, VTO further strengthened the standardization and the streamline across our operational segments. Our end-to-end timeliness ranked number one among tone-down players, and the customer complaint rates continued to decline. We are winning the trust of e-commerce platforms and consumers. Our partnerships with various e-commerce platforms have deepened, particularly in reverse logistics services and the remote area express delivery services. As a result, our retail parcels grew over 40% year over year. The optimization of our revenue structure has effectively alleviated pressure due to price competition. Combined with strong and sustained cost efficiency and a stable SG&A expense structure, we further widened our lead in proposal operating profits. China's express delivery industry experienced a 20.1% year-over-year increase in the third quarter. There is an expanding proportion of low-priced e-commerce parcels. And the price sensitivity fueled by weak economy contributed to the recent trend of mixed shift. We believe that higher quality focused growth of the express delivery industry depends largely on the certainty and the sustainability of the microeconomic recovery and the growth. The current new economic dynamics presented the challenging question of how to balance across our core values. that is, quality of services, scale, operating profit, and interests of franchisee partners. Maintaining and expanding our scale leadership advantage is one of the precursors for achieving growth with both quantity and quality. In keeping with ZTO's practical culture of finding and resolving issues, we reviewed our work for the past few quarters and identified needed improvements, particularly in division of duties and the coordination between headquarters and the provincial management, alignment of market conditions and the pricing flexibilities, effectiveness of incentives, and fairness and the transparencies in network policies. Key improvement tasks We'll focus on the following. First, reviewing pricing policies thoroughly. We ask provincial management to be more responsive and stay relevant to market conditions. And we shall provide them with greater autonomy, making comprehensive assessment of customer needs in high production regions to better align pricing with service requirements. Coordinating sales and cost differentials with customized strategies to share resource burden and profit allocation among the pickup partners, delivery partners, and brand operator. Second, eliminating complex policy to drive simplicity, standardization, fairness, and transparency. Meanwhile, be ready to provide unique incentives coupled with targeted expectations, providing certainties and confidence to network partners who will then become more enrolled and ready to respond whenever there is a call for collaboration. optimizing the effectiveness of a coordination mechanism organized by locals to take pause and foster accurate communications and synchronized action. Their key objectives are to promote end-to-end initiatives aimed at enhancing couriers' willingness to serve retail parcels, to promote infrastructure-alloying direct linkage from outlets to last-mile posts, This objective will aid the gradual reduction of delivery costs, increase retail volume, and boost income for network partners and couriers. Four, accelerating the deployment of last mile IT systems and strengthening the commercial content by 2C Life Plus to address diverse needs of local living. It goes beyond decreasing last mile delivery costs to deepen and expand connections with consumers and customers, and ultimately benefiting the core business. Fifth, leveraging FinTech tools such as direct settlement to incentivize LASMA responsiveness and on-demand service capabilities, thereby improving the economic efficiency of pickup and delivery operations. Last but not the least, while driving continuous cost production gain, systematically focus on the pace of capital investments and the capacity reserved to maximize resource utilization in a more scientific way. China's economic growth has underscored the persistent demand for logistics services over its more than 30 years of development. As the industry continues to evolve with increasing volume concentration, yet quality bifurcation, we inevitably will face varying competitive pressures, especially amidst turning points of economic cycles. Since ZTO's founding, each new set of challenges we face has given rise to a transformation and a progress. As an industry leader, ZTO services stability, wise and depth of network coverage and penetration, cash generation, and financial strength, ability to renew and upgrade our managerial skills, among other core strengths, all fortress our competitive advantages. For ourselves, we intend to maintain our leadership in service quality, to widen our leading scale, and to achieve sound profitability. For our partners, we are committed to enlarging the footprint and solidify the economic foundation of the LASMO POST network, increasing earnings by our franchisees and careers. These are the essential objectives and tasks for the fulfillment of ZTO's long-term growth corporate mission so as to create value for our shareholders and society. Next, let's welcome our CFO, Ms. Yen, to present the financial results and future plans. Ms.

Thank you, Chairman and Sophie. Hello to everyone on the call. As I go through our financials, please note that, as I specifically mentioned, all numbers quoted are in RMB, and percentage changes refer to year-over-year comparisons. Detailed information on our financial performances, unit economics, and cash flow are posted on our website. And I will just go through some of the highlights here. In the third quarter, we adhered to the principle of profitable growth and achieved a 15.9% growth in parcel volume to reach $8.7 billion, while continuing to improve the quality of services and brand value. Our adjusted net income increased 2% to 2.4 billion. ASP for the core express delivery business increased 1.8% or 3 cents as the impact of decline in the average weight per parcel and increase in incremental volume incentives were offset by the positive impact of the volume increases in retail parcels. Our total revenue increased 17.6% to 10.7 billion. Total cost of revenue was $7.3 billion, which increased 15.2%. Overall unit cost for the core express delivery business remained flat at $0.82. Specifically, unit cost of line haul transportation decreased 9.7% to $0.39, driven by better economies of scale, improvements in fleet operation with better resource utilization, unit sorting costs decreased 6.4% to 25 cents, mainly attributable to improved standardization in operating procedures and increased automation. Key KA costs increased 6 cents, which is in line with KA revenue increases. Gross profit increased 23.2% to 3.3 billion, and gross profit margin rate increased 1.4 points to 31.2%. Income from operations increased 17.3% to 2.8 billion, and associated margin remained relatively stable at 26.6%. SG&A expenses excluding SBC as a percentage of revenue increased 0.2 points to 5%, corporate cost efficiencies remained intact. Income tax expenses were $555 million compared to $271 million in the same period last year. Let me remind you that in the third quarter of 2023, Shanghai Zhongtongji Network Technology Company Limited, a wholly-owned subsidiary of the company, received an income tax refund of $200 and 7.1 million RMB for being a key software enterprise for the whole tax year of 2022. Operating cash flow was 3.1 billion for the quarter, an increase of 5.9%. Adjusted EBITDA was 3.7 billion, an increase of 8.7%. Capital expenditure totaled 1.8 billion, and we anticipate the annual expenditure of CapEx to come in at around $6 billion. We are on track to achieve another year of free cash flow. Now let's turn to our guidance. Based on current market and operating conditions, the company revises its previously stated annual guidance. Parcel volume for 2024 is expected to be in the range of $333 billion to $339 billion, representing a 11.6% to 12.3% increase year over year. These estimates represent management's current and preliminary view, which are subject to change. We have guided down our annual volume targets based on our visibility into the rest of the year. The increasing proportion of low-value e-commerce package, which may persist for a while, presented new challenges to our approach to our overall corporate strategy. We are recalibrating focuses among quality of services, volume, market share, and profit. Particularly, modifications are being made to our pricing practices, for example, with the intention of stimulating high-volume daily average customers to work with our brand. These are with the strong intention of regaining volume growth momentum and expand our existing market share leadership. The quality of our earnings are expected to remain intact. This concludes our prepared remarks. Operator, please open the line for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Quan Lee Fan from Morgan Stanley. Please go ahead.

Thank you, operator. I have two small questions. The first question is about... For the next year's market plan, we certainly hope that the macroeconomic economy will have a very good recovery. However, if the growth quality of the entire market continues to be like this year, in the second half of the year, or in the third or fourth quarter, uh uh focus on high-quality value-added growth in the market. This is the first small question. The second small question is about the implementation of the repurchase plan. Do we have any more detailed implementation plans for our repurchase plan? Before the end of June next year, have we been able to complete our repurchase plan? Let me translate for myself. So thank you, Benjamin, for taking my question. I have two questions. The first question is about capacity plan for the next year. If we continue to see a relatively low quality volume growth to continue into next year, specifically similar to what we have seen in the second half of this year, what will be our capacity growth plan for next year. Will it continue to be like mid-teens growth or we will likely slow down the capacity growth expectation and focus on the relatively high end of the market. The second question is about share buybacks. Do we have any further updates or a clearer plan on the execution of our share repurchase plan? Is it still reasonable to assume that we are able to complete all the announced share buybacks by the end, by the mid of next year when the plans, the end of the execution plan mentioned last time. Thank you.

and the three indicators of profit and loss. Our goal is to take advantage of the large share and maintain a reasonable profit level and continue to improve the value of the service. The specific policy is to approach the market in a fair and universal way. to optimize the operation and efficiency of the terminal, thereby increasing the capacity and capacity of the terminal and the operator. Thirdly, we will speed up the deployment of the three terminal houses. We will support the development of the terminal with the required conditions, and reduce the distribution rate through the laser line to increase the efficiency and efficiency of the transfer cost. We will, next year, we will be more close to the market in the distribution of central stations and business people. We believe that in terms of reasonable profit, the ratio of retail will increase, and the share will also increase. In terms of production capacity, the central government's production capacity is actually abundant. In fact, we have built a lot of empty space in the distribution centers around the country. In terms of infrastructure and ability to build, the central government may not be able to support 100 million units, but it may be able to support 1.5 billion units. We don't have to worry about that. In the future, if we try to increase it by another 30% or 40%, Thank you, Chairman, and I will translate for the first question and then I will answer the second question. The overall plan for 2025 is that we will still be

focusing on the corporate strategy of balancing approach or balanced approach to all three, quality of services, volume market share, and also profit. The priorities is shifting, and also we are focusing on regaining the volume growth momentum. And it's based on a reasonable level of profit as we continuously improve the quality of services. There are many specific tasks at hand. So, again, the goal is to expand our market share leadership, maintaining reasonable level of profit as we improve, consistently improve our quality of services. The goal is for our policy to be more relevant and designed around the customer needs and to the market. It needs to be also maintaining its transparency and fairness. The policies are going to be simplified as opposed to too complex and so that it's easier to be understood and addressed very different needs of our customers. The flexibility would also be allowed given the autonomous decision-making ability that we will provide to our regional managers. The overall intention of this initiative is to improve the trust and confidence of our network partners. The second point is to continue to improve the design of our last mile operation. We've talked about the policy of incentivizing our network couriers to respond more towards retail parcels. The machinery that are being installed at our post would allow us to improve the proportion of our packages that goes directly from our outlets to the post, alleviating work pressure of our couriers and, hence, helping them work towards improvements of the retail package as a proportion of their total delivery volume. Ultimately, improve their earnings. The third is again, continuously reaching our goal of trilayer throughput design, reduce the number of sortations overall for all those outlets that met the requirements in terms of volume to go direct between the origination and the destination outlets or sortation centers will be encouraged to do so. This not only will help us reduce the cost, but also improve timeliness of our overall operations. Specifically for next year, regarding our capacity, the current situation of our total installed base is that it's more than capable of supporting 150 million packages a day. Many of our centers today are not at its full capacity, not running at its full capacity. So as we focus on our corporate strategy, improving the retail proportion of our total volume and increasing our market share, these centers with excess capacity would be ready to serve. Now, going to the second question, as far as the buyback program, the overall goal is for us to complete our plan in buyback as it being the first choice of returning value to our shareholders, and the systematic approach will be put in place, and if any access, we will be giving back to our shareholders in the form of dividends. The buyback rhythm will be in accordance with the market development. And we shall accelerate or increase the frequency of such buyback. That answers your question.

The next question comes from Ronald Cheung with Goldman Sachs. Please go ahead.

Thank you, Mr. Lai, Ms. Yan, and Sophie. The first thing I would like to ask is that we see that every package profit system in the third quarter is quite stable from an operating profit perspective. At the same time, our package increase is slow in the industry. We are now adjusting the guidance for the 20th anniversary. In the case of the 4G度, we will put the single package profit and the package increase. What is it that is contained in it? What is the forecast? And then our 4G度 will delay the package increase. Is it the case of the entire industry? Or maybe we can make more profits in 4G? And then the package will probably slow down a little bit. The second is to see, as mentioned earlier, we may need to continue to stabilize the share in 25 years or to do better growth. It mentions lightning, so I want to know if we still have these I want to know the strategy of our online service. Let me translate it. Thank you, management. First question is on, we've seen a stable profit per parcel in the third quarter, while volumes came slightly below industry growth. So given the four-year guidance, does that imply 4Q parcel volumes will be slower? Is that a view on the industry, or are we focusing more on profitability than market share in this 4Q peak season? Second is on a reverse logistics strategy with e-commerce return parcels. What's our strategy there? The typical election is a lot more frequent for these reverse logistics. So how are we adjusting our network for that and our strategy in gaining share in reverse logistics? Thank you.

Because in terms of product quality, scope, and profit balance, we believe that the amount of free delivery is actually increasing. This is the kind of customer that China has discovered. Because China has always advocated a fair and transparent policy environment. That is, every... The market price has been rising since the 40s. Our main goal is to increase the profit of R&D. So the company's profits are still reasonable. We haven't made any major adjustments. We mentioned earlier that we will... We think that in the next four decades, we will not make big moves, but we will make a stable strategy. We need to continue to advance in these three areas. We believe that if you want to increase the number of employees, you will increase the number of employees. How to do it in detail? Three-way work continues to be promoted. Modernization is critical. Increase the accessibility and delivery efficiency of the upper door. It is closer to the user. Our effect is still It's still very obvious. The second thing is to reduce the cost of shipping. If it's discounted, there can be a cost of two to three cents a ticket. If it's done well, its profit will grow. We hope that we are very clear about one thing, which is the stability of the business. First of all, thank you very much for your question.

The guidance is based on our overall approach to balance between all three corporate strategies. And the increase in low volume or low priced volume in the quarter persisted. So in the fourth quarter, we maintained our prior practice in the policy making. We didn't make drastic changes, particularly for those large customer or large clients that might have concentrated our volume. We didn't make special incentive policies for them, because we are trying to continue to maintain a level of balance across our network. There are price increases, either from the government's suggestions in the EU area, or individually there are price movements directed by different market players. Again, the large changes weren't present for this fourth quarter. We were mainly focusing on working in our internal markets management understanding of how we would approach next year. As I mentioned earlier, the work is cut out for us to balance across sorting center outlets as well as our couriers. So we wanted to make a better planning in order to achieve volume increases as well as achieving reasonable level of profit. So for the fourth quarter parcel volume, it's not necessarily slower in the market, but it is the fact that we have maintained our prior approach to pricing, but being ready and preparing for the next year. Your second question as far as how we are able to address the increased perhaps frequency of customer needs in order to improve the retail volume, if I understand you correctly. So the thinking behind what we are trying to do to increase the retail volume is very much so driven by our intention to improve the courier as well as the outlet's profitability. The specific tasks we have identified in all three areas, including helping the outlets to improve their ability to have direct linkage between outlets to the post so that they are able to send the packages directly to the post, on average reducing the cost about 20 to 30 cents. And that also helps our courier to have more time because of the automation that are being placed at the outlets, so the couriers won't need to go and spend time to help sortation. They are able to spend more time focusing on their area of services, which on many occasions has a very small radius so that they could be more responsive to go to serve door to door. We believe If we focus on the last mile post as being the center of the radius of services and allow the courier to work more concentrated their effort to work with their delivery tasks, they are able to improve the percentage of retail price, retail volume. hence improve their profitability. So with our plan to, one, improve the network partners or the outlets' profitability because they are able to reduce the cost of last mile operation and improve timeliness and quality of services, so they are able to make more money. And at the same time, for our network couriers to have stable, and improving profit because of increasing retail volume proportion. With both, then our total network will be more stable because it's more profitable. And that is our intention in the specific tasks that we are consistently carrying out. The initiatives are producing great results as we see a greater portion of our retail volume are coming into the total business. Ronald, I hope that answers your question.

The next question comes from Lori Zhang with Idol Securities. Please go ahead.

Hi, Mr. Lai, Ms. Yan, and Mr. Xiaofei. I'm Luo Yuezhang, an IT analyst at Haikong. Congratulations to the company for sticking to the high-quality development line and achieving a steady growth. I would like to ask two small questions. The first question is, will Taoxi be more active in the competition after the opening of Bindong? Will the development of Yixiangjian be guided further? The second question is, how should the company look at other income projects? Let me translate my question. The first one is, since Taobao started cooperating with JDL, what impact it might have on GTO? The second question is about the outlook for the other operating income items in the next quarter. Thank you.