ZTO Express (Cayman) Inc. Q1 FY2025 Earnings Call

Good day, and welcome to the ZTO Express to announce first quarter 2025 financial results conference call. Please note this event is being recorded. I would now like to turn the conference over to Sophie Li, Head of Capital Markets. 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 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 in 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 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 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. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English.

It is now my pleasure to introduce Mr. Meisong 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 joining today's conference call. In the first quarter of 2025, ZTO maintained its industry-leading service quality, delivering a total parcel volume of 8.5 billion, which is a 19.1% increase year-over-year, and achieving an adjusted net income of CNY 2.3 billion, up 1.6% year-over-year. Our service quality, scale, and profitability continue to lead the industry. In this quarter, the express delivery industry grew its parcel volume by 21.6%. However, there was an increase in the proportion of lower-value parcels, and price competition intensified. To address the mismatch between volume growth and revenue expansion, we are focused on maintaining service quality and volume growth. While rejecting irrational pricing practices, we have strategically increased our engagement in the low-value parcel segment. We continuously improve timeliness and lower unit costs through standardized processes and integration. This allows us to lead with speed, solidifying our brand advantages and driving further efficiency gains. Additionally, to foster long-term competitive advantages, we are empowering our network partners with stable policies while encouraging improvements in last-mile service capabilities and cost competitiveness. Importantly, we have made significant progress in developing differentiated products and services. ZTO has gained greater trust and deepened collaboration with e-commerce platforms and their enterprise customers through improved service quality and coverage. Retail parcel volume rose by 46% year-over-year in the first quarter, while reverse logistics volumes surged over 150%. We have strengthened brand awareness and customer loyalty, resulting in a CNY 0.12 positive shift in average selling price for core express services. Through digitization and accountability measures, we have lowered transportation and sorting costs by CNY 0.09 year-over-year, highlighting ZTO's commitment to enhancing sales and effectively addressing problems. By combining cost efficiency with disciplined management spending, we have controlled profitability amid intense competition. As we move into the second quarter, the express delivery industry continues to show high growth momentum, although price competition has intensified. Despite the challenging competitive landscape, we remain committed to our strategic goals established at the beginning of the year: maintaining high quality, exceeding industry average volume growth, and achieving a reasonable profit level. Our specific initiatives include enhancing network policy effectiveness by promoting collaboration and resource allocation, along with tailored performance incentives. We aim to unlock value for both new and existing customers while ensuring fairness and transparency. We are also focused on improving last-mile capabilities and profitability by refining our partner network structure, enhancing network partners' working capabilities, and establishing direct links between outlets and last-mile hubs. This strategy will help reduce last-mile costs and enhance income diversification for network partners, driving earnings growth for both outlet operators and couriers. Furthermore, we are optimizing revenue by meeting the demands of e-commerce platforms, refining logistics products, enhancing brand recognition, and maximizing resource utilization through improved planning and data analytics. Over the past 23 years, ZTO has grown from managing fewer than 100 packages per day to handling over 100 million parcels while maintaining top service quality. This achievement is a testament to the commitment of everyone under the ZTO brand, reflecting our partners' and customers' trust, along with expectations from society and the country. In light of today's competitive environment and challenges in volume compensation, ZTO's strategic focus remains on solidifying our leadership in quality and scale while ensuring reasonable profits. We recognize that the competitive landscape is rapidly changing. ZTO will continue to prioritize healthy and sustainable growth, embrace innovation driven by data and experience, fulfill our social responsibilities, and create value. Staying grounded, we concentrate on the current tasks while ambitiously planning for the future. We are practical and progressive, striving to build a lasting enterprise for future generations. Next, let's welcome our CFO, Ms. Yan, to present the financial results and outlook.

Thank you, Chairman Lai, and thank you, Sophie. Hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB and 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'll go through some of the highlights here. In the first quarter, we adhered to the principle of profitable growth and continued to improve the quality of services and customer satisfaction. Our parcel volume grew 19.1% to reach CNY 8.5 billion, and we achieved CNY 2.3 billion adjusted net income, which increased 1.6%. Total revenue increased 9.4% to CNY 10.9 billion for the first quarter. ASP for our core express delivery business decreased 7.8% or CNY 0.11 given intensified competition. The CNY 0.06 impact of decrease in average weight per parcel and the CNY 0.16 in incremental volume incentives were partially offset by the CNY 0.12 positive mix shift from increased proportion of KA volume. Total cost of revenue was CNY 8.2 billion, which increased 17.9%. Overall unit cost for the core express delivery business remained flat at CNY 0.94. Combined unit costs of sorting and transportation decreased CNY 0.09 for the quarter, benefiting from economies of scale and various cost productivity initiatives. Specifically, unit cost of line-haul transportation decreased 13.2% to CNY 0.41, driven by more effective route planning in conjunction with improvements in fleet operations. Unit sorting costs decreased 10.4% to CNY 0.27, benefiting from improvements in automation and labor efficiency. Other costs of revenue included KA-related pickup and delivery fulfillment costs paid to our network partners; and on a total volume denominator basis, it increased CNY 0.10, which was in line with KA volume increases. Gross profit decreased 10.4% to CNY 2.7 billion and gross profit margin decreased 5.4 points to 24.7%. SG&A, excluding SBC, decreased 13.5% to CNY 517 million. SG&A expenses, excluding SBC, as a percentage of revenue decreased to 4.7%, reflecting strong corporate cost efficiency. Income from operations increased 6.1% to CNY 2.4 billion, while the associated margin rate decreased 0.7 points to 22.1%. Adjusted EBITDA increased 0.7% to CNY 3.7 billion, and operating cash flow was CNY 2.4 billion for the quarter, which increased 16.3%. Capital expenditures for Q1 totaled CNY 2 billion, and we anticipate our annual CapEx in 2025 to be between CNY 5.5 billion to CNY 6 billion. Now moving on to our business outlook. Based on our assessment of today's market conditions and business plan performance outlook, we are reiterating our 2025 full year parcel volume guidance of 40.8 billion to 42.2 billion, which equates to a 20% to 24% increase year-over-year. These estimates represent management's current and preliminary view, which are subject to change. Now this concludes our prepared remarks. Operator, please open the line for questions. Thank you.

The first question today comes from Ronald Keung with Goldman Sachs.

The first question is about competition, especially regarding the second quarter, as we aim to grow faster than industry volumes. In the first quarter, we were slightly behind the industry, so I would like to know what level of investments we are prepared to make to meet our volume target and what the implications will be for our overall profit for the rest of the year. Additionally, we have observed significant growth in retail parcels and reverse logistics. I would like to understand the scale of this business and the key targets moving forward.

I would like to know how much we are willing to invest to achieve our volume target, especially since the first quarter saw us growing slightly slower than the industry. Additionally, I am interested in the implications for absolute profit for the rest of the year. Furthermore, we have seen significant growth in retail parcels and reverse logistics, and I would like to understand the scale of this business and its main targets.

Thank you for your questions. First of all, our goal is to achieve volume growth, which aligns with our strategy of ensuring quality services while focusing on and expanding our volume leadership, all while maintaining a reasonable level of profit. In the first quarter, we managed to maintain the overall structure of our network policies, and we specifically introduced existing and incremental volume policies to incentivize our network partners. As a result, we have narrowed the gap between our volume growth and the industry average. While there remains a gap, we plan to continue narrowing it, and our overall annual strategy and guidance for the year remain unchanged. Regarding the second part of your question, we have concentrated on upgrading our revenue structure and have achieved significant results with retail parcels, especially in reverse logistics. In the first quarter, our daily parcel volume averaged around 6 million, reflecting a year-over-year increase of 45%, which outpaces overall market growth. The reverse logistics segment exceeded a daily volume of 3.5 million, with a year-over-year growth of over 150%. We are working on measures such as enhancing transportation capacity, training our network partners to improve efficiency in meeting quality standards, and implementing incentive policies for service upgrades and expanded coverage. We expect our parcel volume to increase significantly, possibly reaching 8 million daily and even exceeding 10 million on peak days. Regarding competition, reverse parcel pricing remains under pressure; however, reverse logistics services have high entry barriers. ZTO's early efforts and our strong relationships with platforms position us well to outperform our peers, who are also focusing on this area. We continue to enhance capacity and responsiveness in two-door delivery and pick-up, which aids our couriers in serving customers effectively. Improving our network partners' and couriers' earnings by increasing the share of retail parcels in total deliveries will enhance their stability and, by extension, the stability of our overall network. I hope this addresses your question.

The next question comes from Qianlei Fan with Morgan Stanley.

I have two questions. The first question is about unit revenue and cost. In the first quarter, the volume incentives reached approximately CNY 0.16, which is an increase compared to around CNY 0.04 in the same quarter last year and CNY 0.02 for the entire previous year. Looking ahead, how should we project unit volume incentives for the full year? Regarding unit costs, in the first quarter, excluding the impact from KA, the reduction in unit costs appears to be more significant than we initially expected at the start of the year. Considering the first quarter results and the relatively low fuel prices this year, do we have an updated forecast for unit cost reductions for the full year? My second question concerns AI. ZTO has been actively exploring AI applications in its management and operations. Can you provide an update on any progress with AI's application in the business year-to-date? Looking forward, what do you see as the potential impact of merging AI with our operations in terms of competitive advantage against peers and overall earnings performance?

Seems we lost connection with our speakers, and they've joined back in.

Thank you for your question. The first inquiry concerns our unit revenue and costs. The decline in single parcel average pricing can be primarily attributed to two factors in the Q1 market environment. First, competition has intensified significantly, leading to ongoing pricing pressure. Second, there has been an increase in the proportion of lighter or smaller parcels. Both factors necessitate the implementation of increased incentives to remain competitive, particularly some aimed specifically at ZTO. On a positive note, we have experienced significant growth in KA volume, which has outpaced the overall market and contributed approximately CNY 0.12 to offset losses from volume incentives and parcel weight declines. Moving forward, we will maintain our focus on volume, ensuring that it is accompanied by high-quality service. Our strategic approach will continue to balance these priorities; in instances where necessary, volume will take precedence. As we adapt to market conditions and competition in various segments, pricing and volume will be adjusted accordingly. Overall, the changes in our revenue per parcel are heavily influenced by the competitive landscape. On the cost front, we are persistently advancing our cost efficiency initiatives. In the first quarter, our transportation cost per parcel decreased by CNY 0.06, and sorting costs fell by CNY 0.03, driven by economies of scale from our business growth. The reduction in parcel weight and ongoing cost management efforts have enhanced our operational efficiency. We have improved our operational management processes, strengthening the standardization of each segment. We utilize technology to set cost standards and track data in real time, allowing us to identify anomalies quickly and refine our optimization methods. Additionally, we have restructured our compensation to increase performance-based pay, linking incentives to operational efficiency, task complexity, and workload, which motivates employees to perform more proactively. We also enhanced our accountability measures, linking specific drivers to vehicles and implementing a parcel tracing system to address operational issues effectively. This ensures that responsibility is clearly defined with established reward and reprimand processes to maintain standardized operations. In the future, we will focus on further technological upgrades to shift from reactive to proactive management, striving for precision in controlling process quality. We are also committed to implementing smart technology to reduce reliance on manual labor and optimize costs throughout the production chain by improving outlet infrastructure and strengthening connections with last-mile services, which will help minimize delivery costs at the outlet level. Regarding AI applications in our business, we have deployed AI in various scenarios at ZTO. For instance, machine vision technology in our sorting processes has significantly decreased sorting errors. Our monitoring technologies and advanced algorithms have enhanced efficiency in delivery route planning. Additionally, our barcode recognition system allows for detailed delivery directions and supports our knowledge-based model, helping both employees and couriers optimize their delivery planning and freeing up capacity for more focus on retail parcels. Looking ahead, we will continue to explore the integration of artificial intelligence in last-mile delivery and autonomous vehicles, ensuring we align technology with our operational needs and realize benefits from ongoing technological progress. Thank you.

The next question comes from Amy Han with Citigroup.

Let me translate for myself. The first question is about cost. What is our progress in direct linkage in the first quarter? How significantly can direct linkage or overall value chain cost optimization contribute to our unit cost reductions on the franchise side and across the entire value chain this year? My second question concerns parcel volume growth and market competition. With the June 18 shopping festival approaching, what are our expectations for parcel volume during the shopping period and overall volume growth? Will price competition ease in the first season? Given that price competition has been more intense and started earlier this year, what is our perspective on the potential for further average selling price drops in the industry?

What are our expectations regarding unit cost reductions on the franchise side and throughout the entire value chain this year? Additionally, as the June 18 shopping festival approaches, what should we anticipate for parcel volume growth and market competition? Will we see a decrease in price competition in the first season? Given that price competition began earlier and was more intense this year, what is our perspective on the potential for further declines in average selling prices within the industry?

Thank you very much for your questions. First of all, on our direct linkage from outlets to the last-mile hub progress, this year, we have focused on optimizing outlet layouts and promoting direct sorting and direct delivery to increase the proportion of end-to-end direct linkages. This is a critical mission for our overall business focus. The goal is to clearly reduce last-mile delivery costs and increase the outlets' earnings. Our goal of CNY 40.8 billion to CNY 42.2 billion for the total year will translate into about CNY 4 billion of additional cost savings and hence improvements in earnings for the network partners at the outlet level. I will give you an example. The work we've put in mostly relates to introducing sorting equipment to help improve the efficiency of our outlets. On average, we have installed equipment that will automate the sorting work done by the outlets. Typically, that single machine can sort 8,000 to 9,000 packages per operation time frame. For those outlets handling at least 30,000 packages per day, these machines are suitable for installation. To provide some specific examples, these machines help reduce sorting costs based on the current situation of CNY 0.02. The location fixed cost is about CNY 0.03. If you bring the package from our super sorting center to the outlets, the transportation cost will be about CNY 0.05. Combined, these yield a CNY 0.10 saving, equating to the CNY 4 billion that I referred to earlier. This process of establishing direct linkage is aimed not only at our profit statement but at our network partners to ensure their ability to improve efficiency, reduce costs, and secure network stability because, as you know, as competition heats up, it becomes ever more important to maintain the trust, hope, and belief of the network partners. Our strategy is very clear; as the entire industry sustains pressure from profits, even though volumes are growing in total, the front-end pricing is decreasing, and the proportion of small and light parcels continues to increase. Everyone, including ZTO, is feeling the pinch, as you might be able to see from everyone’s earnings announcement. We are focusing on ensuring the connectivity between the super sorting center, outlets, and network couriers are properly set so that interests are balanced and aligned. The division of duties, as well as the rewards, are suited for today's competitive environment because, without a stable network, we have no future to speak of. Our goal is reiterated for the full year; as we draw near to the second half of the year, we will continue to monitor the market, being flexible and disciplined in our pricing practices and supporting our network partners in their stability and long-term trust so we can all work together to bring about normalized market growth in the long run after the storm.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, everybody, again, for joining today's call. As we mentioned, we continue to focus on being our best and setting our sights on the competition at hand, as well as allocating necessary resources to build strong momentum in narrowing the gap to industry growth in volume, and building a stronger foundation for the future of our business. We welcome your questions and discussions with us after today's call and look forward to speaking to you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.