Zto Express (Cayman) A

Good evening and welcome to the ZTO to announce first quarter financial results on May 20, 2020 conference call. All participants will be in a listen-only mode. There will be a presentation followed by a question and answer session. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. I would now like to turn the conference over to Ms. Ong Lai Chairman and CEO, please go ahead.

Thank you, operator. Please allow me to read the safe paper first. Hello, everyone. Thank you for joining us today. The company's results in the investor relations presentation were released earlier today and available on the company's IR website at ir.bpo.com. On the day-to-day from BPO are Mr. Mason Lai, Chairman and Chief Executive Officer. and Mrs. Huibin 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 will take place. 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 statements. Further information regarding this and other risks uncertainties and factors is included in the company's balance 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. Hello, everyone.

Thank you for attending today's telephone meeting. In 2020, considering the impact of the epidemic, the central government's overall business is fundamentally reasonable. We have completed 23.7 billion units of business and 6.4 billion yuan of adjustment and net profit. The market share of the central government has increased by 18.9% compared to last year. The downfall of unemployment and high-speed roads, the reduction of income tax policies and the drop in the international oil price, the increase in single-voting and the decrease in the cost of transportation, all of these have reduced by 3.1%. Partly because of the pressure of single-voting in the system. During the pandemic, the effective control of unemployment and the policy of the country has been greatly supported. The express delivery service as a subsidizing industry for the people's livelihood and employment, has not been successful for the first time. In March, in the express delivery industry, the volume of business increased to 23%. In April, it gradually increased to 32%, exceeding the same level as last year. In the same way, the number of online sales of food products has decreased by nearly 20% in the number of social consumer goods sales. On the one hand, due to the epidemic, The online consumption has increased and the online shopping has increased. Social consumption has accelerated to the online market. On the other hand, the fast-food industry is well-prepared and can respond quickly, providing online sales with the protection of the exchange rate. Since the resumption of operations at the end of February, the President has followed the prediction of a good trend in market development, and through the unified planning and the system of the Provincial Department and the Provincial Management Center, At the same time, while maintaining the necessary measures against the epidemic, it is necessary to accelerate growth, expand the leading advantage, and continue to increase the strategic focus of the market share, and carry out the following comprehensive deployment. Re-designate the goal of business volume in the third quarter, and divide it into layers to meet the assessment criteria. Second, build more high-capacity vehicles. Improve the ratio of the head of the vehicle and the frame, and further adjust the structure of the transport resources to the maximum extent to reduce the use of third-party logistics. Fourth, build a comprehensive transport line the number of participants and the number of debtors, to promote the integration of resources, to integrate the movement, and to gather a large amount. Five, through the abundant cash reserves and diverse financial resources, to have a market potential and a solid business base, to provide mobile funds and multiple places for investment and other financial resources. according to the target of the business, to carry out these or immediate support. Six, continue to guide and increase the deployment and construction of end-to-end resources, trying to know the cost of controlling the end-to-end operation and the cost of dealing with customers. Seven, in establishing an excellent small and medium-sized supply chain, sending the standard execution to the right place and science and technology support, employees provide work efficiency, and other aspects, and further improve their skills. The digitalization of software and software, as well as the monitoring and management of this kind of monitoring, will form a responsible and fast response mechanism. In terms of the development and application of information technology, the Chinese Communist Party has gradually rolled down the system and standards from the concept of the Chibu Islands. through data to follow up on the modernized management of stocks and stocks. The digital operation platform, which focuses on business, finance, and information integration, will further support decision-making, process monitoring, and decision-making, to ensure that the pre-said strategic deployment can be efficiently deployed. It shows that the COVID-19 pandemic has brought great challenges to society and the industry, as well as opportunities. The consumption of society and the way of life have therefore accelerated changes. China's Internet Information Center has reported that since March 2020, the number of netizens in China has increased by 9.04 billion, with more than 700 million users on the Internet. At the same time, the demand for telecoms and social media purchases is growing rapidly. The rapid development of digital economy has become a new starting point for economic development. Express delivery will play a more and more important role as a chain of consumers and producers. We believe that the leading enterprise of the CCP as a delivery company will be able to support the values, human resources and capital resources that have been accumulated in the past. excellent operating system, and stable cooperation network. We continue to break through ourselves and grasp the new wisdom of the new economy. We have walked the 18-year road of adults. We are still in this era of full development, and we dare not have a good generation. In the next 18 years, Zhongtong will need to expand its new business capacity, integrate and develop resources in the new business segment, and meet the needs of customers. In the future, Zhongtong will not only be a courier company, but will also have the advantage of eco-competitive advantage in terms of platform positioning. thousands of individuals and professions will work on this platform. The Chinese Communist Party is not just a small brand. The brand is the feeling of sharing. It is the bond of trust and trust. It is the spiritual state of the society. It is the way of life of the whole country. We just started at the age of 18. Thank you, Chairman.

Please allow me to translate first. Hello, everyone. Thank you for joining us for today's conference call. Considering the impact of the COVID-19 pandemic during the first quarter, the ETO's overall performance was better than expected. we achieved a $2.37 billion parcel volume and $635 million of adjusted net income. Our market share went up slightly to reach 18.9% and faded from the national total fee waiver and the declining global oil prices. Our combined sorting and transportation costs per parcel decreased 13.1%. partially offsetting the ASP decline in the first quarter. During the pandemic, express delivery as one of the backbone industries to support social stability returned to normal operations ahead of many other industries, thanks to strong policy support. The industry possible volume growth recovered to 23% in March, and further improved to 32% in April, which was faster than last year. Online retail sales of physical goods grew 5.9%, even as total China's consumer retail sales fell nearly 20% in the first quarter. On one hand, consumer sending migrated from offline to online during the pandemic to more volume and across greater categories. On the other hand, the express delivery industry responded quickly to provide logistic support with an ample capacity reserve. Things were doing operations late February, observing a positive trend of growth, which took comprehensive measures surrounding our core strategy of accelerating possible growth, raising our competitive lead, and further expanding our market shares through coordinated effort of central office and the provisional headquarters. First, We reset our body goals for the upcoming trip orders, distributing targets to each level of responsible units. We reintroduced incentive policy catered to differentiated market conditions, such as pickup versus delivery and customer make-up, and mobilized the entire network to respond to competitions more effectively. We brought in more high-capacity vehicles, further optimize the engine-to-trailer ratio, and improve the supply mix to minimize use of third-party trucking. Essentially dispatched and coordinated ROF selection, XM capacity, and load demand so as to maximize utilization and acquire incremental volume. By leveraging our strong cash reserves and diverse financing credentials, to ease the liquidity pressure and help the CapEx funding for a number of qualified network partners with solid market potentials and some operations. Depending on the level of targeted business, these network partners were awarded with varying degrees of subsidies. We continue to encourage our network partners to secure first mover resource for establishing last-minute solutions and capabilities. This will not only help contain last-mile costs, but also establish content connection with consumers. We increased efforts to further empower frontline personnel to be self-sufficient and work more efficiently, such as recognizing staff components, reinforcing standardized SIPCA and delivery fee schedules, and upgrading technology and operating tools. We strengthen the central quality monitoring and the control mechanism to improve accountability and improve the responsiveness. With development and application of technology, DTO has gradually shifted from a KPI-oriented mindset to a management approach that pays more attention on standardized operations and process, relying on data tracking and outcome measurements. CTO is building a digital workspace that will integrate business operations, financial management, and data analytics, which is becoming more and more capable of supporting decision-making, process monitoring, and in-time modifications to ensure strong execution of our strategies. While the COVID-19 outbreak levied tremendous challenges, it also brought about new opportunities. manufacturing, consumption, and even lifestyles are rapidly changing. According to the statistics from the China Internet Network Information Center, as of March 2020, there were more than 900 million internet users in China, of which over 700 million were online shoppers. New marketing practices such as live streaming and virtual community wholesale are thriving. The explosive growth of the digital economy has become a new growth engine. Express delivery will play an increasingly important role to connect the consumers and producers. We firmly believe that DTO is well-positioned to break through and seize that pace. Because we have well-established the corporate values, the most capable teams, and the strongest capital reserves, as well as the most efficient operations and the most stable partner network. We just celebrated DTO's 18th anniversary. We are grateful for being part of this great era of vitality, and yet, we must constantly stay vigilant, looking to the next 18 years. We will expand our capabilities through integrated resources and innovation to diversify products and service offerings that are better fit for evolving customer demands. In the future, BTO will become far more than an express delivery company. Together with the developing adjacent and innovative businesses, BTO will transform ultimately to an equal advantage of platforms. Millions of entrepreneurs and enterprises will walk, operate, and interact with each other. He will not only become a ubiquitous friend, but a culture of shared success, a voice that connects trust and expectation, a desire to give back, and a way of life that brings happiness to more people. At 18, we have a leader. That's now here from our CFO on our financials.

Thank you, Chiang. Thank you, Sophie. Hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentage changes refers to year-over-year comparisons. Detailed analysis of our financial performance in economics and cash flow are posted on our website, and I'll highlight some of the key points here. Although adversely affected by global pandemic, COVID-19 outbreak, our parcel volume still grew 4.9%, reaching 2.4 billion, and our market share expanded 0.3 points to 18.9%. Our revenues decreased 14.4% to 3.92 billion. For our core express delivery business, ASP decline of 37 cents or 19.4% for the quarter, was at a similar level of the industry peers. It consisted of 32 cents of volume incentives representing added support to our network partners to maintain competitiveness and to cope with the pandemic impact. Growth profit decreased 35.3% to $819 million. and gross profit margin decreased 6.6 points to 20.9%. This was a combined result of unit price decline, as previously noted, better than expected cost productivity gain, and of course, increase in volume. Unit transportation costs declined 15 cents to 55 cents, primarily due to EGC waivers since mid-February and a decrease in diesel price. Increased number of self-owned high-capacity trailer trucks and better resource planning, as Chairman mentioned earlier, contributed to the cost decline. Unit sorting costs increased two cents to 41 cents Because fixed costs were with limited volume leverage as COVID-19 forced temporary shutdown of our sorting operations until gradually reopening in mid to late February. SG&A as a whole decreased 0.4%. Excluding share-based compensation costs, personnel costs decreased 5.8%. Income from operations excluding SBC decreased 39.1% and associated margin rate declined 6 points, which is consistent with margin decline. Operating cash flow was $177.8 million for quarter compared with $633.3 million in the same period last year, decreased resulted mainly from $311 million net profit contraction and $209 million increase in accounts receivables related to qualified network partners who were granted extended payment terms for transit fee payments. CAPEX spending for the quarter was $1.73 billion. We further strengthened our infrastructure in anticipation of future volume increases business, as well as resource planning for development of our system, we anticipate our CapEx plan remain to be around $6 billion to $8 billion for the year. After depreciation and amortization increasing 40% and 35% respectively, our EBITDA was $1.2 which declined 21%. Our transit and sorting capability and capacity, as well as operational efficiency against rising costs of labor relies greatly on sufficient infrastructure investment. Now let's turn to business outlook. While the world outside of China is still coping with COVID-19 outbreak, we hold a optimistic view on domestic Chinese economic recovery development. Based on April and May performances so far, we're confident in delivering top line and bottom line growth for the year. We target to achieve an annual partial volume in the range of 15.9 billion to 16.4 billion for the year, representing a 31% to 35% growth for the whole year, or 37% to 42% for the next three quarters combined. At the same time, we expect to deliver an adjusted net income in the range of 5.39 billion to 5.83 billion representing a 2 to 10% increase for the year, or 10 to 20% increase for the combined last three quarters. These current estimates are prudent and are reflective of our preliminary view, which are subject to change as we continue to monitor the change in the competitive environment as well as the economic environment. 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 touch tone 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. Please keep your questions to two at a time, and if you wish to ask more, please re-enter the queue. At this time, we will pause momentarily to assemble our roster. Your first question comes from Beiyang Zai from Citi. Please go ahead.

Good morning, Mr. Lai, Ms. Yan, and Sophie. First of all, congratulations to Citi for its performance in such a difficult situation. I have two questions to ask. The first is to ask Mr. Lai. The second is to ask Mr. Lian. Mr. Lai, I want to ask, in fact, recently we have seen e-commerce recovery is very strong, and it has also driven the entire express delivery industry to be very good. That also means that it is possible that now we no longer need additional pricing methods. In fact, the increase in volume of natural growth should also be good. Will this make us change the competitive strategy we talked about before? Or will we still stick to our previous competitive strategy and want to improve the industry as soon as possible? The second question is to evaluate President Yan's guidance. This amount of guidance is very favorable. But in fact, seeing this year's profit guidance, it feels a little conservative. This guidance, the high point of this year's guidance is at 10%. Previously, it may be that everyone thought that this 10% of this non-gap increase should be a base case. I don't know how the guidance is considered behind this. Is it still because of the factors of price and the high-speed road toll added two months in advance? So my first question is to Ms. Lai. Given so strong rebound of e-commerce growth in China, which leads to very strong growth of express delivery volume as well, maybe we don't need actual pricing computation strategies anymore. We can still achieve very good volume growth. Will this change our previous expectations computation strategy. And my second question is to Ms. Yan. It's mainly regarding on the guidance. The volume guidance is actually quite good, but in terms of the three-year non-GAAP profit guidance, it seems a little bit conservative given the high-end is at 10% young-year growth. Previously, we think 10% young-year non-GAAP growth could be a base case. What's the considerations behind Is it because of the AFP pressure or we see the total recharge a height of expectations by two months? Thanks.

Hello. This is indeed the case. After the epidemic, the whole industry's business volume has been relatively advanced. At that time, we also saw that In fact, the price decline and competition are still very intense. The Chinese Communist Party has always maintained the balance between the three lines of market share, profitability, and service quality. This year, in fact, since the epidemic, the Chinese Communist Party has been focusing more on the improvement of service quality. We hope to use our service to increase the age of our customers, especially I don't think so. First, let me translate for the chairman, and then I'll answer your second question.

The first part is, yes, we have observed healthy recovery in the marketplace since recovery in the second quarter. The price competition has appeared to be intensified as we look around performances. I think the growth is there for volume, but it's not easily had simply because of the increase in the total net volume. We do have a responsibility and also an intention to first secure our existing volume And then secondly, focusing on our core strategy to gain more incremental value, which would include gaining volume from other players and other peers. But our focus still is on all three aspects of a business improvement, volume, quality of services, and productivity. Price is indeed to be closely watched throughout the rest of the year, and hence, that leads me to the second question, the answer to the second question. As we focus on quality of services, especially since the pandemic, we realize that our customer loyalty comes from not only existing ways of delivering product and services, but also it's important for us to differentiate, to come up with differentiated product to further aggregate the volume in the marketplace to build our vertical capabilities. The guidance for the volume is reasonably based on the overall economic outlook, including those statistics published by the Central Post Bureau. We are also looking at a gap to fill for the first quarter. And in order to reclaim the whole year, we did put forth a reasonably achievable and also sound earnings guideline. And second aspect to the second question is, as Chairman mentioned, the first quarter is behind us, and we've noticed the market competition is intensifying. So with that uncertainty in place, we want to be able to leave room for us to respond quickly. Again, our focus is to accelerate our market share growth and expand the lead distance to further accelerate our market share increase. Volume is of the utmost importance to us amongst all three focused initiatives or goals. So, leaving sufficient confidence for our operational people, as well as making sure we are able to deliver on our promise, we've set the outlook as such.

Your next question comes from Xin Yang from CICC.

Please go ahead. I have a question. The position of the Chinese Communist Party is clear, but since last year, it has entered the market smoothly. And now, including G2 and Zhongyou, they have also entered the market and are backing some e-commerce platforms. I don't know what you think of the competition from these new entrants. So actually, JTO has established an absolute position in the Tongda system. But from the second half of last year, we can see that Shunfeng has entered this market. And also, there's other new entrants like G2 and Zhongyou. So what do you think about the current situation?

Thank you. Hello. uh uh Thank you, Yangxin, for your question.

The chairman says China express delivery market or China's delivery logistic market as a whole requires many players in order to properly serve. We ZTO will continue to focus on our own capabilities and competitive advantages. We are building our infrastructure. We are focusing on improving our quality of services. And ultimately, whichever the business form or whoever enters this place to compete, a value proposition to the consumers, to our customers is the key. We are focusing on the lowest cost, the highest efficiency, and the best quality of services. And that's what we are going to continue to do going forward.

Okay, thank you, Mr. Lai. Thank you, Ms. Yan.

Your next question comes from Fan Chou from Bank of America. Please go ahead.

Thank you, Mr. Lai, Ms. Yan, and Sophie. I'm Fan Chou from Meilin, Meilin, Meilin. I have two quick questions. One is about the cost side, because we know that China is still able to use automation, then upgrade the truck, etc., to save the cost of each ticket. But I would like to ask, how much space do we have in the future to take down the cost of each ticket? Then I would also like to ask how much is the average load rate of the company's latest truck, and then compared to the same period last year, Thank you, management. I have two questions. First, on the cost side, Just want to ask about the room for further unit cost reduction in the future. Given we still see room for CTO to continue to use automation and the upgrades of trucks to continue to reduce unit cost. So just wondering if there's room for further reduction. And second question is about the year-on-year growth of volume for CTO's business in April and the first half of May. Thank you.

This year, we have made some adjustments after the pandemic. Some of you may have noticed that the number of free vehicles has increased significantly. The purpose is to balance the balance between the industrial zone and the non-industrial zone. So, with the growth of the industry, our capacity and space are also further expanded. The downfall of the unit weight of the body is still more obvious. The second is that we have increased our investment in automation. This year, some of our centers will have large-scale self-division. New centers will be able to do unmanned operations. It will greatly reduce the cost. The growth in May is because the entire industry is online. The online sales growth is very fast. Thank you for your question.

Chairman says, ZTO always focuses on cost control, and we will continue to find room, and we do see a room of productivity gain going forward for a longer period of time. If you have noticed, we've made some changes during the first quarter. We have significantly increased self-owned vehicle purchase. and put them into use to balance the volume between output and input region. And as noted earlier, consolidating resources and access load to acquire additional volume. Of course, cost productivity gain is largely reliant on volume and volume increase because of the scale leverage. And what we've seen that as volume increase, our cost on a per kilo basis continue to decrease. Secondly, automation is another aspect where we could gain more productivity. As in the previous couple of years, we have installed a lot of the small parcel sorting equipment And we are now shifting to integrated larger package automation machines to be installed in our new opening sorting centers. Our goal is to achieve those sorting centers to be less reliant on people or people-less operation. And some of our new openings this year, we'll see that becoming a reality. Second question, in April and May, the increase in the e-commerce, the trend is very positive, 23% and then 32% increase year over year. What we saw in May is also potentially going to be a faster growth than the previous couple of months. CTO consequently would also achieve and follow such trend if not exceeding it. Thank you for your question.

Your next question comes from Thomas Chung from Jefferies. Please go ahead.

Good morning. I'm Thomas Chung from Jefferies. We saw that the partial volume of the first half of May was so good. Hi, management. Thank you for taking my questions. I'm asking on behalf of Thomas. And then we saw that our daily volume in the first half of May reached record high with over 15 million parcels. And could you please comment about that? the trend about the June given this different shopping festival going on.

Thank you. We predicted that in June, the whole industry China China China China China China Thank you for your question.

Our outlook for the second quarter or even the third quarter is optimistic. The whole industry is set to reclaim the whole year's growth target, as the Postal Bureau or government have anticipated or estimated the full year's target as 18%. And that target has not changed. A ZTO with its sufficient capacity we are confident to participate in all these online promotional events and face a significant increase in the volume. Our optimum or best efficient volume level currently is set to be 60 to 65 million per day. With that, we are confident to take opportunities from these increases and particularly the promotional period in the second quarter as well as the third or even the next three quarters of the year.

Thank you. Thank you.

Your next question comes from Mickey G from private. Please go ahead.

Uh, uh, uh, uh, uh, uh, 我自己翻译一下。 My question is about the last mile stations. Since market has been a lot of discussion on the 风潮, would management comment on the current progress of our last mile drop-off stations? Thank you.

目前,中通的用量从有 Forty percent of them are donated to users through various end-of-the-year events. The majority of the end-of-the-year events are held in the production cabinet. About 5% to 6% of them. In the future, we will continue to increase the number of end-of-the-year events and further improve the delivery efficiency of couriers. Since the end of 2018, uh... . . . Thank you for your question.

As the last part of 2018, we started to focus more on developing our large-mile capabilities, first from the From the total volume currently, 40% of our volume or packages are being delivered through non-person-to-person on the doorstep delivery. So it is through last mile posts or the pickup boxes. Out of our total 40%, there are about 6% or 5% to 6% that is being delivered or picked up through those pickup boxes. This form of last mile services is necessary in order to cope with increasing costs as well as increasing volume because as an average delivery personnel, the amount of packages, the number of packages that could be delivered is limited. Unless you increase the number of people, there is no other way to serve the surging volume increases. On a last mile additional note is that since last part of 2018, we have collaborated with and built over 8,700 or so of the posts under the Tainiao's brand. And in addition, we also build close to 28,000 of a ZTO-operated post location. All of these are important, as we mentioned earlier, for us to position ourselves to cope with increasing costs as well as making connection to ultimately the last mile consumers. As far as the fee structure produced or presented by Hivebox, we think this is a way of finding balance between the consumers, between the businesses who are out to make a profit ultimately, of course, And also, we are watching. Currently, our posts or our high box are not connecting any fees. In the future, there will be a balance reached between the consumers and the businesses, as well as the last mile delivery personnel.

Thank you. Next question. Your next question comes from Nicole Lee from Maxwell Fund. Please go ahead. Nicole, your line is now live. You may ask your question. Miss Lee, you may have yourself on mute. Your line is now live in the call. Please ask your question. Once again, if you wish to ask a question, please press star then 1 on your telephone and wait for your name to be announced. We'll now pause if anyone else wishes to enter the queue. Your next question comes from Nicole Lee from Maxwell Fund. Your line is now live. Please go ahead. Nicole, your line is now live. You may have yourself on mute. There are no further questions at this time. I'll now hand back to the speakers for closing remarks.

Thank you everyone on the call. The first quarter is behind us as we said that we are set to achieve greater goals going forward for the next three quarters. The business outlook is positive and we're preparing ourselves and our preparedness is intact, is there. Our focus is on volume increase and accelerated market share gain, as well as protecting the quality of services and earnings capabilities. So we look forward to have further discussions with you, and thank you again for joining today's call.