ZTO Express (Cayman) Inc. Q3 FY2025 Earnings Call

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 Ms. Huiping 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 follows. I remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking 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's 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. China's express delivery industry experienced steady growth during the third quarter of 2025. While maintaining its industry-leading service quality, ZTO grew its parcel volume by 9.8% year-over-year to reach 9.57 billion parcels. Our adjusted net income was CNY 2.51 billion, which rose 5% over the same period last year. During the quarter, the government advocated for grassroots interests against involution and promoted more orderly competition by curbing unreasonable low-price practices. As a result, the overall pricing level across the express delivery industry stabilized and began to recover. Adhering to our balanced approach to a quality-first growth strategy, ZTO rose to higher standards for model enterprises and reinforced the principle designed to achieve coordinated development with both high volume and high quality. We encourage our network partners to reduce costs and increase income by strengthening last-mile pickup and delivery capabilities to become the preferred choice for the last-mile market. ZTO's retail parcel volume maintained strong growth momentum and grew close to 50% year-on-year. Through optimizing the pickup model and refined lean process management, we enhanced both service quality and cost efficiency. For transit efficiency, ZTO continued to advance the application of smart technology in transforming standardized cost control mechanisms, implementing more effective resource allocation and performance metrics. The combined unit cost of transportation and sorting decreased by CNY 0.05 year-on-year. Entering the fourth quarter, overall industry volume growth exhibited some moderation. While uncertainties and short-term challenges in the macroeconomic recovery still exist, the long-term prospects for the express delivery and logistics industry remain positive. We will stay focused on enhancing our product and service capabilities. In the next phase, we will prioritize the following five areas of work. First, uphold service quality as our lifeline, establish a comprehensive end-to-end quality management service system with integrated platform service indicators for performance evaluations, assign clear responsibilities and accountabilities, ensuring continued service leadership. Second, deepen last-mile capability build-out, expand upgrades of sorting capabilities at outlets, further implement direct linkage and incorporate local commercial opportunities, hence reduce delivery costs and enhance last-mile profitability through a higher retail parcel mix. Third, optimize network policies and incentivize mechanisms while ensuring steady volume growth, enhanced policy transparency and fairness, and implement relevant incentive mechanisms to cultivate intrinsic motivation. Fourth, advance end-to-end cost efficiency and synergy, leverage cutting-edge technologies and digitization tools to optimize route planning with appropriate matching to transit capacity, more scientifically plan for capital investment and utilization, and improve coordination across all stages of operations, helping network partners to continuously improve their operational efficiency, reduce last-mile pickup and delivery costs and achieve higher earnings. Fifth, safeguard fairness and grassroots interests, improve communication and governance, promptly address genuine concerns and resolve real issues, protect the legitimate rights and interests of outlets and couriers, and maintain trust and confidence in our brand. The express delivery industry is currently undergoing a strategic shift from prioritizing high volume towards development in both quantity and quality. Against today's macroeconomic backdrop, the increasing proportion of low-priced parcels presents unique new challenges for top-tier enterprises like ZTO. Facing this structural change, ZTO stays the course in prioritizing quality of services and winning through efficiency. Through continuous product upgrades and refined process management, we navigated a complex market environment, upheld high quality of service standards, and scaled up within reasonable earnings parameters. In the meantime, our network partners that are baptized by fierce price competition are actively innovating and forging last-mile capability and business models with more diverse revenue. Better operational efficiency, with higher confidence in the success of operations, the advertising network is becoming even more resilient. Competition is an inevitable growth phase for the majority of industries. Looking ahead, we firmly believe that by leveraging the vast potential of a solid growth foundation and vibrancy of China's economy, ZTO can perpetuate our unique culture, rely on our robust infrastructure, and with our strong operational capabilities and sound financial strength, we are able to seize opportunities in the ongoing development of the express delivery and logistics industry. Together with all our partners, we can create greater value and bring happiness to more people through our products and services. Next, let's invite Ms. Yan to present the financial results and guidance.

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 financial and performance information, unit economics, and cash flow are posted on our website, and I'll go through some of the highlights here. In the third quarter, in alignment with the government's appeal against involution, we reaffirmed our focus on quality, enhancing our core competencies to advance high-quality development. Our parcel volume reached 9.6 billion, which grew 9.8%. Adjusted net income increased 5% to CNY 2.5 billion. ASP for core express delivery business increased 1.7% or CNY 0.02, and the breakdown are the following: CNY 0.18 positive contribution from the increase in KA volume, mainly comprised of headquarter contracted reverse logistics products and services. This growth was partially offset by a CNY 0.02 decrease due to lower average weight per parcel and a CNY 0.14 reduction from higher volume incentives. Total revenue increased 11.1% to CNY 11.9 billion as a combined result of volume and price increase. Total cost of revenue was CNY 8.9 billion, which increased 21.4% as a blended result of significant increases in costs associated with non-e-commerce volume relative to the rate of decrease in costs for e-commerce volume. From the overall unit cost perspective, core express delivery business increased CNY 0.09 to CNY 0.91. Combined unit costs of sorting and transportation decreased 7.7% or CNY 0.05 for the quarter, benefiting from economies of scale and various productivity initiatives. Specifically, unit costs for line-haul transportation decreased 11.5% to CNY 0.34, thanks to enhanced route planning in conjunction with optimizing fleet operations. Unit sorting costs remained stable at CNY 0.25 due to improved labor efficiency through automation, offset by higher costs from new facilities that commenced operations in the quarter. Unit KA costs increased CNY 0.14, which is in line with KA volume growth. Gross profit decreased 11.4% to CNY 3 billion, and gross margin rate dropped 6.3 points to 24.9%. SG&A excluding SBC grew 16.2% to CNY 633 million. SG&A expenses, excluding SBC as a percentage of revenue, slightly climbed to 5.3% compared to 5% in the same quarter last year, primarily due to higher depreciation and amortization expenses. Income from operations decreased 15.4% to CNY 2.4 billion and associated margin dropped 6.3 percentage points to 20.3%. Operating cash flow was CNY 3.2 billion for the quarter, representing a 3.2% increase. Adjusted EBITDA decreased 4.2% to CNY 3.6 billion. Capital expenditures for Q3 totaled CNY 1.2 billion, and we anticipate our annual CapEx expenses in 2025 to be CNY 5.5 billion to CNY 6 billion. Now moving on to our guidance. With visibility into the final quarter of the year, we are adjusting down the annual volume guidance to be in the range of 38.2 billion to 38.7 billion parcels, representing a year-over-year growth of 12.3% to 13.8%. Volume is critical to a scale-leveraged business, and partner network stability is the foundation for sustainable long-term growth of our company. As the macro environment continues to evolve and industry dynamics shift towards more orderly competition, we are confident in our ability to execute the overall corporate strategy as well as tackling challenges in the near term. This concludes our prepared remarks. Operator, please open the line for questions. Thank you.

Two questions. One is about the industry structure and outlook. Given that we've seen growth convergence and pricing have stabilized temporarily, how should we think of the year ahead and the long-term market structure as we are still in a relatively fragmented industry landscape? Second is about integrated logistics opportunities besides express delivery. What are we doing on the higher end or overall supply chain logistics offerings to provide a more integrated service to your customers?

Thank you for your question. The very first question is really related to the competitive and industry dynamics and where it's going. We believe that the scale and better services as well as higher efficiency and cost-effectiveness will lead to greater opportunities. So we have continuously focused on becoming the best of ourselves because the future belongs to the stronger ones. Looking into the future, we, again, will continue to focus on now as we look forward. There are several things that we are continuously focusing on. The first one is to strengthen the competitive advantage of our core businesses. Three perspectives or three areas that we will be paying attention to. The first one is to strengthen the connectivity or relationship between the outlets, the couriers with our sortation center. It's mainly for allocation of interest, allocation of roles and responsibility as well as rewards across these all three points with better equity and equality. The second part is that express delivery mainly serves the 2C consumers. We, leveraging the installed base, will have an opportunity to bring solutions for the greater logistics market. Currently, we have express delivery, we have LTL business, cold chain in warehouse cloud operation as well as last-mile outlets. We believe the competitive landscape will shift towards comprehensive capability focused. We will not only serve 2C; we will also serve modern manufacturing, agriculture, and more specific scenarios such as bringing products and services from factory directly to consumers, bringing agricultural products out of the field directly onto people's dinner tables. For all these specific scenarios, we will participate with higher quality, higher efficiency, and this will lead to a differentiated competitive advantage in the future for us.

I have two questions. The first one is about the anti-involution. So do you have any comments on the anti-involution's potential impacts, specifically on the outlook for market pricing? We have noticed that the company's guidance on volume for the fourth quarter of this year implies a quite wide range of growth outlook. What's the consideration behind this outlook? Specifically, Mr. Yan just mentioned that there are some considerations of near-term challenges. What are these near-term challenges? And what's the outlook for next year? My second question is about recent news talking about regulators had a conversation with ZTO's management on its network management. Can any details be shared? And is there any potential impacts we should be expecting?

Thank you very much for your question. The sustainability of the anti-excessive competition policy was related to your first question. Since August of this year, the anti-involution policy has been progressively rolled out across most regions nationwide, aiming at rational recovery in pricing. This policy directly addressed the pressure caused by excessive price competition since earlier this year. It called for the industry to turn towards orderly competition and healthy development. So we expect this trend to continue and the effort will also continue to take effect. As the anti-involution guidance continues to take effect, the overall industry attention is shifting from high-volume growth focused to a combined effort in high-quality development as well as high volume, with greater emphasis on service quality and sustainable long-term viability. Once the assessment period concludes, we think market rates are expected to stabilize above at least the cost levels, promoting healthier competition. We also believe that the regulatory focus will continue to advocate high-quality development and disciplined market practice. On one hand, policies will continue to encourage companies to build competitive advantages through innovation, technology, effective managerial skills, and services. On the other hand, regulators will remain vigilant and intervene as needed to cease practices that could harm grassroots interests or disrupt social stability, protecting sustainable long-term growth. As an industry leader, ZTO's quality-first and balanced development strategy is fully aligned, and we are engaged with the regulatory guidance. We view it as a growth opportunity and will take proactive steps to provide a model effect for the sector. First, we will continue with investments in automation and digitization to strengthen our operational capabilities. Second, we will pay close attention to constructive feedback from outlets and couriers to strengthen network stability. Third, we will pay strategic focus to provide a benchmark effect for higher quality development for the industry. As to the recent consultation by relevant government agencies, we believe that the recent regulation consultation is consistent with the anti-involution policies as well as our intention. It is also related to certain isolated cases that arose from network complaints. The express delivery industry is shifting from high-volume growth to high-quality development at the same time. This is the overall guidance with anti-involution policy as well as the specific consultation. It requires all participants, especially ZTO as a leading player in this industry, to provide exemplified model effect. In the short term, we think that these consultation events serve as an important reminder for us as well as stress tests for our managerial attention and capabilities. We have taken the feedback constructively and seriously and are treating it as a catalyst for further improvements internally. We have thoroughly reviewed our system in feedback as well as providing greater visibility and timely feedback in addressing specific issues. In the long run, we believe that proactively embracing and leading this high-quality transformation not only is consistent with our regulatory and market expectations but also builds a more robust and sustainable collaborative model for us to work with all constituents in our industry and in our end-to-end businesses. This will help us attract higher-quality customers and partners, ensuring a longer and sustainable growth.

Let me translate for myself. My question is about volume. As we noticed that the industry has experienced more or less notable volume slowdown recently. So I'm just curious about the underlying drivers behind it. Is that more related to the pricing recoveries recently? And also, how should we think about the volume growth for next year? Also, any potential changes in the competitive landscape or competition dynamics and volume slowdown going forward?

Yes, indeed, thank you for your question. We have noticed a long-absent decline or deceleration in the industry. The recent announced October average growth of the industry is low single digit, a phenomenon not seen for a long period of time. Therefore, we think that the recent deceleration in the industry growth is primarily due to the price increase driven by the anti-involution policy. This adjustment, where overall logistics prices have increased, has a greater impact on low margin and highly price-sensitive e-commerce merchants, resulting in a decline in that segment of the parcel. Overall, the sector's parcel volume mix is shifted again towards a better structure with higher economics. Leading express delivery companies with stronger service capabilities and well-established product portfolios are poised to regain their competitive position. In other words, those that typically gained volume from lower-priced packages will be impacted more negatively. Looking ahead to next year, we expect the industry volume growth to perhaps stabilize and most likely stay around 10%. This sector is shifting away from a singular focus on volume growth towards higher quality as well as quantity development. With market resources increasingly gravitating towards service quality and operational efficiency, the future reshaping of the competitive landscape will be driven by ongoing regulatory influence alongside corporate self-discipline and standardized operations, paving the way for a healthier competitive landscape and sustainable long-term growth.

If the anti-involution policy continues in 2026, considering that the industry CapEx of 2025 would be actually set for a higher growth rate expectation, would this possibly bring any challenges in our cost reduction if a lower cost growth is shown in 2026? And as a result, could we shed more light on the cost improvement in 2026? And the second question would be regarding the competition structure. As we can see that after setting price for some parcels in the major markets, for example, in Guangdong and other provinces, would it lead to a more focused shift of the price competition from the lower kilogram range to a higher one?

Thank you very much for your question. Yes, ZTO has always been focusing on our cost efficiency. From the first development of our company, we focused on capacity and infrastructure development; our competitive cost advantage is very apparent. As the industry progressed, you saw that various other peers have also invested in facilities, equipment, as well as transportation capabilities. Our competitive cost advantages across the industry are becoming more closely matched. We think that the focus now is not just on transit and line-haul because out of the four segments of the end-to-end services we have collection as well as delivery. For total end-to-end cost reduction or cost efficiencies, we have initiated work in, for example, the three-plus-one effort to continue to improve the cost equation across the whole process. We invested in technology, invested in higher efficiency in matching capacity as well as the demand for capacity. We have helped our network partners to improve their automation capabilities as well to improve their efficiency, allowing, for example, the couriers to focus more on their delivery work, while at the same time reducing the outlet's overall last-mile cost. We believe that with the existing operational layout, the cost advantage will eventually be diminishing. However, with greater attention to the end-to-end all segments coordination and integration in reducing costs, improving efficiency, not only will the transit and sortation segments of our business continue to lead in cost efficiency, but our network partners will also gain an advantage in becoming the lowest cost in the last-mile as well as the pickup. Hence, we have high confidence in maintaining our cost leadership going forward. The second part of your question relates to what we will observe going forward; the smaller packages will become a lesser component of the total volume. Thus, based on the capacity layout of our whole network, we should appropriately allocate and match resources. For example, in the middle and western part of our network, we should be able to gravitate more towards some policies for higher weight. From an overall perspective, we do have high confidence in managing the policy in addressing the shift in the mix of our volume. Again, we will continue to focus on our balanced approach to developing volume, scale, and reasonable profit levels, all under the premise of high quality of products and services going forward. We believe this will conclude our call for today. Again, thank you, everybody, for joining us, and we look forward to further discussions with you offline.

Thank you. This concludes today's conference call. We thank you all for attending. You may now disconnect your lines, and have a wonderful day.