ZTO Express (Cayman) Inc. Q2 FY2025 Earnings Call

Good day, and welcome to the ZTO Second Quarter and Half Year 2025 Financial Results Conference Call. Please note today's 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 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 Mr. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights followed by Mr. 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 this and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking 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.

Thank you, Chairman. Hello, everyone. Thank you for joining today's conference call. In the second quarter of 2025, the express delivery industry continues to see strong growth, with business volume increasing by 17.3% year-over-year. ZTO follows a quality-first principle, and with an industry-leading service level, we grew parcel volume by 16.5% year-on-year to reach 9.85 billion and gained market share sequentially. Despite intense market competition, ZTO achieved an adjusted net income of RMB 2.05 billion. During the quarter, we observed a trend toward a higher proportion of light and small parcels in the industry as more merchants opted for economical delivery services. The benefits of ZTO's premium pricing, supported by our extensive network and leading service quality, were not fully realized. In some areas, especially major production zones experiencing extreme price competition, volume growth was lower than anticipated. Conversely, ZTO's retail parcel volume grew by over 50% year-over-year. Since last year, we have focused on enhancing our volume mix and upgrading service capabilities and efficiency. By improving service quality, such as timeliness and coverage expansion, retail parcel volume accounted for over 8% of total volume during the quarter. This optimization of volume structure eased pressure from volume-based subsidies, resulting in a positive contribution of CNY 0.17 in revenue and CNY 0.02 in gross profit for our core express delivery business. Furthermore, through ongoing digitization and intelligent operations, we optimized resource allocation and accountability, achieving a RMB 0.07 productivity gain in combined transportation and sortation costs compared to the same period last year. This improvement reflects our strategic commitment to enhancing operational capabilities and validates that differentiated, high-quality products and services are crucial for building a competitive edge moving forward. A stable eco network and long-term confidence in franchisee partners are essential for sustainable development of the express delivery franchising model. ZTO's commitment to shared success aligns with government intentions and emphasizes safeguarding grassroots interests. Supported by a strong operational system, we empower our network partners for mutual success. Our efforts to address front-end empathy in price competition are advancing with several core focuses: first, optimizing network policies to ensure transparency and fairness across similar outlets. We are implementing targeted incentives that align with market realities to avoid excessive subsidies. Second, enhancing last-mile efficiency through automated sorting and transportation equipment to reduce manual work. Third, promoting retail responsiveness and fulfillment by unifying goals and allocating profits to motivate couriers. Fourth, redefining the value proposition of last-mile posts by integrating them with convenience options to create more efficient consumer connections. After over 20 years of rapid growth, China's express delivery industry has become the largest and most efficient globally, contributing significantly to the country's socioeconomic development. ZTO has demonstrated that leading scale and operational efficiency are fundamental for sustained growth. The industry dynamics are changing, shifting from volume-driven expansion to balanced growth in quality and quantity. Competition will transition from basic delivery to comprehensive logistics solutions facilitated by digitization and intelligent operations. We have navigated challenges and established our presence in the industry. Through continuous effort, we have achieved leadership in quantity, quality, scale, and profitability. With a team of dedicated employees and partners, we aim to improve lives while ensuring our own prosperity and happiness. Looking forward, the evolving economic and competitive landscape presents new challenges, but we believe in the growth potential of China's express delivery and logistics sectors. ZTO's strong culture, infrastructure, franchisee network, and financial strength will support our long-term strategic vision. With unwavering commitment, we will collaborate with our partners to create lasting value for society and returns for our shareholders. Now let's invite Mr. Yan to discuss the financial results and guidance.

Thank you, Chairman Lai and 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 second quarter, we continued to prioritize quality, which helped to drive volume expansion and cost optimization. Our parcel volume reached 9.8 billion, which grew 16.5%. Adjusted net income decreased 26.8% to CNY 2.1 billion, largely attributable to competition-based price decline. ASP for the core express delivery business decreased 4.7% or CNY 0.06. The breakdown is as follows: CNY 0.05 decrease from the decline in average weight per parcel and CNY 0.18 decrease from higher volume incentives. These decreases were partially offset by a CNY 0.17 positive contribution from an increase in KA volume, mainly comprised of headquarters contracted reverse logistics products and services. Total revenue increased 10.3% to CNY 11.8 billion as a combined result of volume increase and price decline. Total cost of revenue was CNY 8.9 billion, which increased 25.1%. Overall unit cost for the core express delivery business increased CNY 0.07 to CNY 0.89. Combined unit cost of sorting and transportation decreased 11.1% or CNY 0.07 for the quarter, benefiting from economies of scale and various productivity gain initiatives. Specifically, unit cost for line-haul transportation decreased 14% to CNY 0.33 given enhanced route planning in conjunction with optimizing fleet operations and lower fuel costs. Unit sorting costs decreased 7% to CNY 0.25, benefiting from automation and labor efficiency. Unit KA costs increased CNY 0.15, which was in line with KA volume growth. Gross profit decreased 18.7% to CNY 2.9 billion, and gross margin rate dropped 8.9 points to 24.9%. SG&A, excluding SBC, grew 5.9% to CNY 621 million. SG&A expenses, excluding SBC as a percentage of revenue, declined to 5.2%, reflecting strong corporate cost leverage. Income from operations decreased 23% to CNY 2.5 billion and the associated margin dropped 9.1 points to 20.9%. Operating cash flow was CNY 2.2 billion for the quarter, representing a 37.7% decrease primarily due to higher advances for expanded reverse logistics services and increased dividend without withholding tax payments. Adjusted EBITDA decreased 18.5% to CNY 3.5 billion and capital expenditure for the second quarter totaled CNY 1.1 billion. We anticipate the annual CapEx in 2025 to be CNY 5.5 billion to CNY 6 billion. Now moving on to our guidance. We are revising our parcel volume guidance to be in the range of 38.8 billion to 40.1 billion, representing a 14% to 18% annual increase. Putting it into context, without any question, quality is first. Then volume is mission-critical to us. Meanwhile, there are no excuses for subsidies that are unproductive to us, as a brand operator or to our network partners. That is what we mean by reasonable earnings. By assessing current market and operating conditions and given the visibility we have into the industry's development for the second half of the year, we trust in the operational team's commitment to delivering volume growth at a pace with the industry average for the year, hence, keeping ZTO's market share intact. Above assessments and estimates represent management's current and preliminary view, which are subject to change. Now this concludes our prepared remarks. Operator, please open the lines for questions.

Today's first question comes from Qianlei Fan with Morgan Stanley.

Thank you to the management team for your efforts in enhancing market share, profitability, and service quality. I have two questions. First, I would like to know the outlook for the second half of this year in our industry. I noticed that the implied volume growth range is quite broad. Management has expressed a goal to grow in line with the industry, but I am curious about the uncertainties affecting this growth outlook. What are the key factors that might influence the market growth in the latter half of 2025? My second question pertains to the application of technology and AI. What new initiatives have been adopted this year, and what impacts have these efforts had on cost efficiency, revenue generation, or service quality?

This wide range of growth outlook is mainly due to numerous uncertainties in industry growth. What are the key factors that could impact the market growth outlook for the second half of 2025? Additionally, what new efforts and initiatives related to technology and AI have we adopted this year, and what impacts have we observed from these efforts on cost efficiency, revenue generation, or service quality improvement?

Thank you for your question. I’ll summarize for the Chairman. Our volume growth has fallen short of our expectations set at the year's start. However, in the second quarter, we experienced a sequential increase in our market share, especially in May and June, with growth surpassing the industry average. From January to July, the industry growth was 18.7%, and for July, it was 15.1%. We are noticing a slight slowdown in the industry, and we anticipate that growth rates in the second half of the year will likely be lower than those in the first half. Despite this, we remain committed to achieving balanced improvements in growth, service quality, volume, and profit. We believe the recent market changes, including some regional price increases and smaller logistic fee packages, may lead to reduced volume. Considering these factors, we have adjusted our overall guidance, which remains broad due to the ongoing uncertainties in both the macroeconomic environment and industry competition. Therefore, our annual guidance is set at 14% to 18%. Regarding our recent efforts, ZTO has focused on lean management and digitization to transform our decision-making and problem-solving processes. We plan to further integrate AI tools across all business segments to enhance cost efficiency in last-mile fulfillment for our outlet operators and frontline couriers. Some of our significant initiatives this year include developing a 3D digitized parallel model at the sorting center level for remote management and real-time monitoring, which has reduced frontline management staff by one third and lowered missorting rates by more than 60%. In last-mile planning, we are utilizing AI for site selection, designing direct linkage solutions, and optimizing delivery routes, empowering outlets with better planning capabilities. In customer service, we have implemented an AI-powered service agent system that autonomously handles over 2 million aftersales requests daily, addressing more than 90% of merchants' service needs. This has significantly cut costs in customer service operations and allowed for service availability around the clock, seven days a week. At the employee level, we've launched the Knowledge-based Ask Xiaotong program, serving over 10,000 daily users. Through natural language queries, employees can quickly access accurate business information and operational guidance, thereby improving response times and reducing errors. I hope this addresses your question.

And our next question today comes from Luo Dan with Guosen Securities.

Let me translate myself. How do you see the sustainability of the current price increase in Guangdong? What effect do these price increases in Guangdong have on the company's profits?

How do you view the sustainability of the current price increase in Guangdong? And what's the impact of price increases in Guangdong on company profits?

Thank you very much for your question. It's clear that in the first half of the year, competition has been quite intense. For the industry to continue growing, we need to transition from a focus on price-driven volume to the quality of services to establish a lasting market presence. We believe the industry will eventually stabilize, as price competition is a short-term phenomenon. Since August 5, the entire industry in Guangdong has seen a slight upward price adjustment. The lowest industry price is currently RMB 1.40, which is an improvement compared to the past. The impact on our company is minimal, as this mainly helps to relieve pressure on outlets and couriers by allowing them to receive higher delivery fees. We believe there is a good chance for this price increase to be sustainable.

And our next question today comes from Aaron Luo with UBS.

Let me translate myself. I have three questions. The first one relates to pricing. We are aware that price competition was very intense in the first half of the year, but following the anti-involution campaign, we've observed some price increases in key industry regions. What are your thoughts on pricing trends for the rest of the year and beyond? The second question pertains to unmanned vehicles. We've established close cooperation with leading providers, and I'm interested in the progress we've made and the potential benefits for improving our last-mile delivery efficiency and cost savings. The final question is regarding shareholder returns. Do we anticipate further opportunities for enhancing payouts and share buybacks?

Can you provide an update on our development for the remainder of the year and beyond? Additionally, I am interested in our collaboration with leading providers in unmanned vehicles. What is the status of this development, and how might it enhance our last-mile delivery efficiency and cost savings? Lastly, regarding shareholder returns, do we anticipate further opportunities for improving payouts and share buybacks?

Now let me help translate and supplement where necessary. In the first half of the year, price pressure was significant and competition was intense. Typically, during peak season, prices would rise, but this year, prices remained stable throughout the high season. From the start of the year until July, we noticed a price decline that continued. After August, our initiatives helped achieve a slight increase in market prices. We are addressing those pricing practices significantly below cost. Looking ahead, regardless of competition levels, it's not feasible for express delivery prices to fall below RMB 1 as this is a cost-based pricing system. We are confident that a sustainable competitive environment will shift from price competition to focusing on value and capabilities. On the topic of autonomous vehicles, ZTO has successfully entered the early commercialization phase of using autonomous vehicles, drones, and self-driving technology. We are collaborating with industry leaders who are leveraging AI for practical applications. We have developed our own mapping capabilities and can create high-precision maps to facilitate deliveries. We've completed a parallel digitization model for over 50 sorting centers, allowing for real-time visualization of operations to support intelligent monitoring and management. These technological initiatives will enhance network efficiency and strengthen our competitiveness. We have also commercially deployed autonomous vehicles at several outlets, resulting in substantial cost savings. Currently, we have over 700 outlets in more than 200 cities with the necessary road permits, using over 2,000 autonomous vehicles for deliveries. This year, our headquarters has expedited the promotion of autonomous vehicles by facilitating central procurement and offering discounts while assisting with road negotiations. In the second quarter, we formed a strategic partnership with a leading autonomous vehicle company to explore their use in last-mile delivery and improve performance. Moreover, we have established an autonomous vehicle logistics platform to foster industry standardization. We are working closely with top companies, like Neolix, aiming to expand to 240 cities and deliver over 200,000 parcels daily using autonomous technology. Traditionally, delivery costs around CNY 0.12 to CNY 0.15 per parcel, but with autonomous solutions, this cost will drop to approximately CNY 0.08, demonstrating a considerable reduction. Regarding shareholder returns, the company is considering both dividends and share repurchases to gradually and consistently enhance shareholder value. We currently have ample cash reserves and strong cash generation abilities, and we are structuring our capital flow sensibly. In terms of share repurchases, we are closely watching market trends and stock performance while considering uncertainties and our financial flexibility. We will continue to manage and allocate capital and cash to boost shareholder returns.

Our next question today comes from Lisa Lee at Gold Securities.

I wonder what you think about the potential impact on the overall e-commerce industry and the growth of parcel volume as a result of the increase in parcel prices. Management has previously mentioned that higher parcel prices may reduce demand for lower-end parcels, which could slow down the industry's volume growth in the second half. Looking at the long term, how do we view the relationship between higher parcel prices and the overall growth of the e-commerce industry? What measures do you expect the government might take to balance this growth?

What is the potential impact on the overall e-commerce industry and the growth of parcel volume from the increase in parcel prices? As management has previously noted, higher parcel prices may reduce demand among lower-end parcels, potentially slowing industry parcel volume growth in the second half. Looking at the long term, how do we view the relationship between higher parcel prices and the overall e-commerce industry growth? What actions might the government take to support this growth?

In my opinion, the recent trend indicates that prices are returning to a sensible level. Recently, competition has caused prices and costs to become disconnected. Currently, the lowest price in Guangdong is around RMB 1.4, but this doesn't affect all delivery practices equally. Authorities are focusing on extreme pricing strategies that fall significantly below costs to protect the interests of various operators in the delivery industry, including businesses and couriers. Most merchants still maintain reasonable pricing, so the impact of price adjustments is less pronounced for them compared to the extreme cases involving small and light packages. We believe that offering differentiated products and services is crucial for our customers, merchants, and consumers. While it's easy to lower prices, such reductions do not generate value. The future competitiveness of this industry will hinge on the quality of service and the availability of varied products and services to cater to diverse needs. Consequently, we think the current impact is minimal. Looking ahead, for the long-term improvement of the industry, we need to move from price competition based on volume to a focus on service quality, which can facilitate both economic growth and increases in volume. This is the only sustainable path forward for the industry.

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

Thank you very much for everyone joining today's call. We anticipate conversations and discussions with you regarding any questions you may have. Thank you again.

Thank you. This concludes today's conference call. We appreciate your attendance at today's presentation. You may now disconnect your lines and have a wonderful day.