ZTO Express (Cayman) Inc. Q4 FY2023 Earnings Call

Thank you, operator. Hello, everyone, and thank you for joining us today at the Company's Results and the Investor Relations Presentation that were released earlier today and are available on the company's IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer; and Mrs. Huiping 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 the 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 these risks, uncertainties and factors is included in the company's filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law. It is now my pleasure to introduce Mr. Meisong Lai.

Hello, everyone. Thank you for joining today's conference call. For the first quarter of 2023, ZTO's customer satisfaction continues to improve compared to industry benchmarks. Our volume reached RMB 71 billion, marking a 32% year-over-year increase and 4.8 percentage points higher than the industry average. We achieved RMB 2.2 billion in adjusted net income for the quarter. In 2023, the China Express Delivery sector maintained strong growth, although pricing competition remains a challenge. We have kept our pricing policies consistent across the network but have taken specific measures in certain markets to maintain base volume. Our annual parcel volume grew by 23.8%, reaching RMB 32.2 billion. The core express delivery unit price fell by $0.16 for the year, but this was offset by gains in cost productivity due to digitization and process management that have improved operational efficiencies. Through effective cost control, we increased our adjusted operating margin by 4.3 percentage points to 26.7% for the year. Consequently, our adjusted net income for the year was RMB 9 billion, reflecting a 32.2% increase over 2022. ZTO remains committed to balancing service quality, market share, and earnings. Our objective is to create value, acknowledging that there are trade-offs to manage among competing priorities. In light of economic uncertainties and shifts in e-commerce, we focused on enhancing service quality and distinguishing our service capabilities. Our performance was robust, especially in unit economics and overall profit growth. Although we did not achieve our initial market share goals for the year, our results align with our strategic approach to adapt to the current market context. From a long-term perspective, express delivery is a marathon, and the stable development of our partner network is crucial for ZTO’s sustainability. Fair and equitable policies are rooted in our culture of shared success, and we must initiate programs that build partner capacity, upgrade facilities, enhance resource use, expand last-mile operations, and improve service quality and customer satisfaction. In terms of efficiency, we recorded another year of significant cost productivity improvements. Our total unit costs decreased by $0.17 due to transformation initiatives. Beyond economies of scale, we have actively pursued digitization and lead management improvements, leading to significant outcomes. Defined growth strategies, accountability, and measurement metrics have allowed us to rapidly enhance our operational efficiencies and resource use. Proactive identification of issues combined with effective execution has enabled us to adapt quickly, solve problems, and achieve better results. The China Express sector has seen stable growth in early 2024. New e-commerce channels, such as video streaming and social retail networks, have spurred mass consumption. Although price stabilization and increases are yet to be seen, the transition from quantity to quality is undeniable. We aim to excel by maintaining a solid volume base while ensuring fair economic interests among brand operators, express couriers, and network partners remain central to our future efforts. Our key initiatives include enhancing frontline operational efficiencies, improving transparency and fairness in pricing, and deploying strategies to maximize idle resource utilization while effectively incentivizing volume acquisition. By optimizing our scale advantages, we will minimize aggregation and sort to the smallest delivery unit possible, reducing last-mile delivery costs and enhancing productivity to align with our sorting hubs. We aim to ensure that carriers benefit significantly from non-e-commerce packages, promoting stronger links to last-mile delivery and reducing costs while increasing efficiency and minimizing sortation frequency. Additionally, we will enhance service quality to cater to specific needs, improve pickup and delivery timeliness, including doorstep services, and reduce damages while maintaining a strong emphasis on customer satisfaction. We also plan to improve the accuracy and timeliness of our data analysis using digitization tools to optimize operational management. Moving forward, we believe the China Express industry will continue to diverge in terms of scale and profitability, with increasing concentration. National economic policies have historically supported express delivery companies in scaling and improving efficiencies while enhancing earnings quality. There is much work to align with our country's developmental goals. Underpinned by digitization and environmental awareness, the shift from quantity to quality in express delivery will be central to production, distribution, and consumption, offering high-quality products and services while driving modernization in various sectors in China. There are encouraging growth prospects and potential earnings growth in the industry. Our current strengths will lay the groundwork for comprehensive competitiveness in the future, ensuring our relevance and affirming our commitment to delivering lasting value for our business partners and shareholders.

Thank you, Chairman, and thank you, Sophie. Hello, everyone, to the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB, and the percentage changes refer to year-over-year comparisons. Detailed information on our financial performance, unit economics, and cash flow are posted on our website, and I will go through some of the highlights here. We achieved our volume target by growing parcel volume 32% to RMB 8.7 billion for Q4 and 23.8% to RMB 30.2 billion for the year with the firm execution of our consistent strategies. Our adjusted net income grew 4.4% to RMB 2.2 billion and 32.3% to RMB 9 billion for the quarter and the year, respectively, while we maintained a high quality of services and customer satisfaction. Total revenue increased 7.6% to RMB 10.6 billion for Q4 and 8.6% to RMB 38.4 billion for the year. The average selling price for the core express delivery business decreased 18.2% or RMB 0.27 for Q4 and 11.3% or RMB 0.16 for the year. During the fourth quarter, we did not raise prices as was customary in the past during e-commerce promotional periods due to price competition and our readiness to manage concentrated high volumes. The decrease in ASP was attributable to a mix shift in key account volume, increased volume incentives, and a lower average weight per parcel. Total cost of revenue was RMB 7.5 billion and RMB 26.8 billion for Q4 and the year, respectively, which indicated a 5.5% increase for Q4 and 1.6% for the year. The combined unit costs of sorting and transportation decreased by 14.9% or RMB 0.13 for Q4, with a reduction of 13.2% or RMB 0.11 for the year, benefiting largely from economies of scale. Furthermore, the unit cost of main haul transportation decreased 11.5% to RMB 0.46 for Q4 and decreased 4.1% to RMB 0.45 for the year, driven by more effective route planning combined with rate improvements without impacting timeliness, and decreases in fuel prices have also played a role. Unit sorting costs decreased 20.1% to RMB 0.26 and 15% to RMB 0.27 for Q4 and the year, respectively, driven by increased automation and labor efficiency gains achieved through standardization of operating procedures and optimization of performance metrics. Gross profit increased 12.8% to RMB 3.1 billion for Q4 and increased 29% to RMB 11.7 billion for 2023, the combined result of increased volume offsetting ASP declines and added benefits from cost productivity gains. The gross profit margin rate increased by 1.4% to 29.5% and increased by 4.8 points to 30.4% for the fourth quarter and the year, respectively. Selling, General and Administrative expenses (SG&A), excluding share-based compensation (SBC), increased 24.9% to RMB 0.7 billion for Q4 and increased 14.3% to RMB 2.2 billion for the year. SG&A expenses, excluding SBC as a percentage of revenue remained low at 6.6% for Q4 and 5.6% for the year, as our corporate cost structure remained lean and stable. Income from operations increased 12% to RMB 2.8 billion for Q4, and increased 29.4% to RMB 10 billion for the year. The associated margin grew by 1 point to 25.9% and 4.1 points to 26% for the year, indicating that we have achieved the goal of improving the quality of earnings to a level better than that seen before the COVID-19 pandemic. Operating cash flow was RMB 3.9 billion for the quarter and RMB 13.4 billion for the year. Adjusted EBITDA for Q4 and 2023 was RMB 3.7 billion and RMB 14.1 billion, respectively. Capital expenditures for Q4 totaled RMB 0.9 billion, and the annual CapEx came in at RMB 6.7 billion in 2023, indicating that we have achieved another year of free cash flow. The company has now established a regular dividend policy and has announced a RMB 0.62 per share cash dividend for 2023 for shareholders on record as of April 10, 2024. This dividend represents a 40% payout ratio and a 68% increase from last year's dividend. For 2024, the company plans to declare and pay cash dividends semiannually, no less than 40% of the company's distributable profit for the fiscal year. In addition, the company also announced an upsize of the 2016 share repurchase program by USD 500 million to bring the total authorization amount of the current program to USD 2 billion and extend the program by another 12 months until June 30, 2025. Combining share repurchases and dividends, we are committed to steadily improve shareholder returns. Moving on to business outlook, we anticipate the express delivery industry in China to grow by 10% or more in volume in 2024, and we will maintain our leadership efforts in industry transformation towards profitable growth that encompasses both quantity and quality. A balanced approach to service quality, volume, and earnings is our consistent strategy under the near-term conditions surrounding economic development and industry competition, and our recalibrated strategy is to target healthy earnings while improving service quality and customer satisfaction and attaining appropriate market share expansion. For 2024, the company expects its parcel volume to grow in the range of RMB 34.73 billion to RMB 35.64 billion, representing a 15% to 18% increase year-over-year. These estimates illustrate management's current and preliminary view, which is subject to change. This concludes our prepared remarks. Operator, please open the line to questions. Thank you.

Thank you, management. I have two questions. First, you've shared your expectations for parcel volume growth this year, but what do you anticipate regarding competition, especially in terms of pricing, and how do you view EBIT or profit trends this year, considering we had stable to slightly improved results in 2023 despite strong competition? Second, what is your expected CapEx for this year, and based on cash flows, do you foresee the possibility of a higher dividend payout in the medium term?

In 2024, the government has projected an 8% growth expectation. We believe, as mentioned earlier, that a growth rate of at least 10% is achievable. Our target is to grow between 15% and 18%, which exceeds the industry average. We expect pricing competition to stabilize over time, as this is a typical process in all industries. The market share gained through low pricing is not sustainable. The express delivery sector is rapidly differentiating, with top companies benefiting from scale, financial strength, and stable networks. A noticeable trend is that stronger companies are becoming even more dominant, leading to increased industry concentration and market valuations for leading express companies that far surpass the current levels. We anticipate a shift in competition from basic express delivery services to comprehensive logistics solutions. At ZTO, our focus is on leading the shift from merely quantity to a combination of quantity and quality. We intend to introduce differentiated pricing and unique offerings, including prompt delivery services and reverse logistics, to gain early advantages based on service quality, which we believe is essential for long-term market share growth. We have highlighted several transformations in the industry before. Our goal is to achieve a balanced approach that emphasizes quality improvements while also ensuring positive earnings and market presence. We have set specific objectives to enhance service quality and diversify our product offerings, ensuring timely delivery and a better customer experience. Furthermore, maintaining transparent policies and fair market share distribution among our partners while boosting profitability will be crucial. Regarding your second question, we believe the 40% payout ratio we announced will provide consistent returns to our shareholders. Our strong cash generation enables us to sustain and potentially increase shareholder returns through dividends and share buybacks as our business develops.

Thank you for your question. Yes, we have observed that the competitive environment has been shifting according to economic development and particularly the growth of e-commerce. We believe that the express delivery business must focus on being the best operators possible as this reflects our core goal. With strong cost advantages, superior service quality, and increased service timeliness, we aim to secure our competitive edge. Industry concentration is on the rise, and while companies are still vying for market share, ZTO will ensure our strategy remains aligned with quality service improvements, customer satisfaction, and meeting individualized needs. Maintaining our focus on these three priorities will support ongoing profit growth.

First of all, congratulations to the company for achieving strong performance in the fourth quarter and throughout the year. Since the start of this year, we have seen significant growth among our peer companies. I would like to know which areas the company is currently transforming or adjusting. Is our non-point strategy still effective, and in light of the market environment, are we considering a more aggressive pricing strategy to increase business volume? Thank you.

Indeed, a very clear answer to your question is our long-term strategy; our consistent strategy remains the same. I believe our fourth quarter results alongside our plan for 2024 indicates a strong belief that low-price market share acquisition is not sustainable. As an industry leader, our goal is to balance growing from quantity to quality. We do anticipate industry players will also align with this trend, moving towards quality as a focus, and we believe this shift will occur over the near term. Our overarching objective continues to be fostering equitable interest among all players, including network partners, while prioritizing profitable growth over mere market share gains as we proceed.

Thank you for your insights. As Mr. Lai and Mrs. Yan mentioned earlier, we recognize the importance of enhancing service quality, improving our product mix, and advancing product differentiation. Could you please provide more details about the initiatives planned for this year and the advantages you believe you have over your competitors? Lastly, are there any specific quantitative goals linked to these initiatives?

Thank you very much for your question. Our overall strategy emphasizes focusing on our internal operations while prioritizing service quality and managing relationships between profit margins and market share. At the sortation center level, we will optimize resource allocation to meet the diverse needs of our partners and network couriers. Specifically, our focus will also include reducing overall processing time while enhancing service quality by minimizing losses and delays. Ensuring a clear delineation of roles and responsibilities will enable us to support operational efficiency and service quality gains. Furthermore, initiatives aimed at motivating couriers to secure non-e-commerce and retail volume while enhancing profitability will be implemented. Our aim is to achieve volume growth between 15% and 18% for the business this year, with retail volumes expected to grow at an even higher rate. We intend to move away from price competition and distinctly differentiate ourselves from other competitors.

Thank you very much, everybody, for joining today's call. We welcome further discussions and elaborations on our intentions, which are very clear in the current environment regarding how we grow our business, develop our brand, and improve returns for our shareholders. Thank you again for joining us today.

And we thank the members of the management team for their time as well. The conference call has now concluded. Thank you once again for attending today's presentation. At this time, you may disconnect your lines.