Hello, and welcome to the ZTO's First Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sophie Li. Ms. Li, 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 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 filing 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. Meisong Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English. Mr. Lai, please go ahead.

Now I will translate for chairman. Hello and thank you everyone for joining our call this morning. Our business continues to generate strong growth momentum during the quarter. Our market share increased to 16.1% during the quarter as we exceeded our expectations with parcel value growing to 1.6 billion parcels and adjusted net income of RMB757 million. Including results released by the State Post Bureau we again rank among the top major express delivery companies in China for customer satisfaction during the first quarter. Our goal is to grow our parcel volume faster than the industry average by 10 percentage points each year while achieving targeted profit and improving quality of our services. During the first quarter, we further increased utilization rates of digital waybill to 94% and incentivized incremental growth effectively. Benefitting from growth in the broader market, we continue to improve capacity and efficiency for both sorting and transportation by installing more automatic sorting equipment and adding high capacity trailer trucks to our fleets. At the same time recorded certain number of indirect partner hours to reduce the number of layers in our network to improve both effectiveness of execution and profitability of cost to network. We are also investing in our IT infrastructure to create integrated operating systems and the mobile applications to facilitate data driven connectivity and the collaboration between our employees and network partners as a part of our ecosystem including headquarters, including hubs, delivery hours and last mile. We got off to a good start into 2018 and as we head into the second quarter, we are seeing a new wave of growth across industry as for our core express delivery business, we will sharpen our strategic focus on building a strong and the scalable platform that is well integrated with numerous newer and…

Thank you, Lisa. Hello everyone. Good morning and I'm glad to go behind the numbers to explain what is taking place in our business. Please not that all numbers are in RMB unless specifically mentioned and our percentage refers to changes from prior measuring period unless otherwise testified. During the second quarter we saw good results as ZTO continued to build out our business platform to scale and to quality, where they showed efficiency gains in both sorting operations and transportation. As of March 31, 2018, we have 59 sets of automatic sorting equipment in service across the country compared to 42 lines for that same period last year. This allowed us to manage the average headcount for sorting hub workers to increase by only 7%. This significantly lower than the volume increase of 36%. In addition, we retired older vehicles and added more than a 100 high capacity long haul trailer trucks to our self-owned fleet. Quarter end number of self-owned trucks decreased year-over-year by a 100 to 3,500, yes, the efficiency has increased. Since late 2016, we have gradually reduced our dependency on outside transportation services which is relatively less cost effective compared to our increasingly better managed self-owned fleet operations. Our total revenues increased by 35.6% to RMB3.45 billion. We started consolidation of the recent acquired trade forwarding business what we called COE or CO E in the fourth quarter of 2017. COE contributed revenue of 293.3 million during this quarter. Excluding COE our core express deliveries business revenue grew 24.3%, primarily driven by increases in parcel volume and offset by the decrease in per unit price. First, weight per Parcel declined during the quarter, second, our waybill usage increased to 94% compared to 79% in the same period last year. Third, the digital waybill unit parcel…

Yes, thank you. [Operator Instructions]. And your first quarter comes from Ronald Keung with Goldman Sachs.

Hi, Meisong and Sophie, thank you for taking my question. Two questions. Firstly can you just go through how you've seen the parcel market is trending, particularly given the reacceleration that Meisong just mentioned. Given our volume guidance from last quarter 28 to 30 to this quarter 35 to 38. So given that Meisong ZTO is targeting 10 percentage points faster than the industry, how do we see the industry growth for this year and our targeted parcel growth? And within that can you just let us know how the split between platforms are doing particularly the Taobao, TMO [ph] contribution in parcel returns and in terms of the news advertising platform that has been rolled out [ph] how much is that in your household contribution and how do you see growth between these major platforms trend. Thank you.

Okay, let me translate for the Chairman. Yes, we didn't achieve the 10% during the first quarter. However if we look at the third month in March, and also looking into the April month, we are confident that we are able to attain the goal that we set for ourselves. Specifically in March the average of the market increase was 30% and for us 43%. On the second part of your question, the increase in the e-commerce as a whole is benefiting the entire express delivery industry. We did see the TMO and Taobao contribution to our total volume decline slightly and also some of the newcomers in the platform business such as [indiscernible] contributed to the increases to our volume as well. And we believe going forward we will continue to serve the entire e-commerce businesses including TMO and Ping Do Do [ph] and the alike. Okay, next question.

Thank you, and the next question comes from Nicky Ge with China Renaissance.

Thank you for taking my question. My question is about the direct shipping impact on the profitability and the volume side. Are we going to use this strategy going forward in the rest of the year? Thank you.

The direct shipment route connects the pickup service outlet to destination storing hub. And the direct shipment business has been developing rapidly in 2017 and in the first quarter of 2018 we began with about 3700 shipments per day. There are nearly 200 routes that shipped from the pickup location direction to the sorting hub at the destination. It accounted for 5% of the total route. And before 2017 only some of our major outlets like the one in EU [ph] had a direct shipment businesses. Now let me clarify that it is not the case where every delivery company is capable for running direct shipping models effectively or efficiently. First parcel volume needs to reach certain level. It needs to be large enough to fill the trucks on each route and we normally make arrangements based on routes truck and parcel volume growth rate, we would calibrate all these factors to make decisions on which route to open for volume for direct shipping. And direct shipping, direct shipping are not only help our partners reduce transportation cost, improve expressly their efficiency and it also reduces parcel damage by reducing sorting frequency and also increased headquarter profit.

Thank you. And the next question comes from Vivian Tao from Citi.

So my two questions, the first one's on ASP, we have noticed the ASP has declined from - RMB2.23 to slightly over RMB2 in first quarter. Just wonder what was cause by that, can management please provide some further breakdown and how much of that decline is attributed net weight of the average weight of the parcel and how much was attribute to the direct shipment et cetera? The second question is on the cost associated with serving the enterprise client. We have noticed this cost has declined to RMB60.5 million in first quarter this year, and the amount RMB148 million in fourth quarter last year. Just wonder what was the reason caused this decline? Thank you.

Okay. I'll just take this question. The ASP decline yes, you are correct is due to several reasons, the mix of our business and also the parcel weight decrease is really the main driver. If I were to breakdown the weight increase in application or usage contributed to $0.04 of that difference and then the majority of the incremental subsidies that we provide to incentivize incremental growth accounted for about $0.02. And then the rest are all due to the parcel weight decline because again it's largely volume driven and we bill by weight. And then the second question is that if you compare to the fourth quarter, there is a seasonality of factors involved. So the cost of serving large client did decline.

Okay. Thanks Huiping Yan.

Thank you. And the next question is from Eric Zong with Macquarie.

Okay. So I will translate it for myself. So my question is about the company's medium term strategy. So if we were to strip out on the tax impact for second quarter so according to the guidance the second quarter unit led profit should see a small year-on-year decline. So I was just wondering if you could share with us on your strategy going forwards because lots of your competitors are aggressively gaining market share with attractive pricing strategy. And also their unit led profit declined like in the first quarter as well. So, are you considering a more aggressive pricing strategy to gain market share as well or that means - so that perhaps means you may now maintain a flat unit led profit going for? But however your revenue growth can be soft as well? Thank you.

Let me first translate for the Chairman. Yes, your observation is correct that we have guided a lower profit growth than volume growth. And our strategy again to iterate is that we will focus on volume growth. The competitive landscape is apparent that we did see certain of our peers have implemented aggressive pricing strategies. And at [indiscernible] we will balance between the profit and the quality of our services. But our primary goal is to maintain market leadership in terms of volume. So going forward we will look at and focus mainly on incremental volume growth. Now again if I may go a little bit further, incremental volume growth means one, we will ensure the base volume is properly incentivized by our consistent and stable policy in place. The incremental volume will be driven by new incentive policies that will less likely increase ZTO's profit but gaining market share for the business as a whole. So this is our distinct strategy and we will maintain that going forward. And if I may myself to add to the comment that ZTO has historically been focusing on the entire network's profitability including our network partners. And the pricing approach, pricing strategy in our mind should not be based on sacrificing our network partners' profitability. So our goal and continue to be our philosophy is to drive incremental growth and we will incentivize efficiently and effectively on incremental growth without taking away from our network partners which ultimately will drive stability to our network for longer term. Thank you.

Okay. My second question is on the CapEx for first quarter. So there is a hike in CapEx in PBE. So I was wondering what the reason behind that CapEx hike. Thank you.

Yes, the CapEx increases are mainly driven by our heightened and increased attention on facility automation. And that will drive efficiency and will prepare us better for the future growth that is really coming as we see it. Now the CapEx investment RMB7 million are largely associated with our sorting equipment. And going forward in fact our overall goal or plan for the year will be increased in other words in prior quarter we have guided RMB3.5 billion to RMB4 billion total CapEx spending. We will be increasing that to RMB5 billion to RMB5.5 billion, driven mainly by one increasing of our overall automation capability as well as increasing and expanding the automation capability further down to the network layers. And IT investment is also another area of our focus, as we turn ourselves more into relying on data driven decision making and dynamic planning as we increase our capabilities.

Thank you.

Thank you.

Thank you. And the next question comes from Edward Xu with Morgan Stanley.

The first question is about your margin. We see that your GP margin actually improved year-on-year, which I think it's a positive surprise given that the GP margin for your peers generally declined in first quarter and especially this is given high oil price and also the improved - the consolidation of the sorting hub in your P&L. So can you give us more detail the explanation on how you achieved this margin improvement. And second question is I found that the share based compensation was booked at RMB 200 million in first quarter while this item was more evenly distributed in the four quarters. So which means that do you still have more share based compensation to be booked in the next few quarters or this gets over. Thank you.

Thank you Edward for your question. Yes the GP margin performed quite well this quarter. Now we have pointed out that main driver for our efficiency gains were coming from two aspect. One is as we build our transit capability and then two it's in our entire operation of the sorting hub. The sorting hub of course driven by the increased amount of automation, the cost per unit had decreased significantly. Now a larger driver of course as you can see is in our transit operations. If I may point out first, transit costs in the first quarter of 2017 are unusual or abnormal and the reason I say that is since 2016 the double 11 period, if you recall that we have - put in a more straight term, the third-party transportation costs was out of control. And since then we started to focus more on balancing the need of third-party transportation capabilities as well as at the same time looking at how we should build our own fleet and build our own capabilities. So as we implement that focus throughout fourth quarter of 2016 and the first quarter of 2017 there are gradual decline of costs but yet still we do, as we are building our own capabilities we still incurred higher than what it should in third-party transportation costs. So if you were to breakdown the incremental gain that we have in about close to $0.20 of this year and reduction of the transportation associated costs, partially if not - if maybe half of that is attributable to the current implementation of a better fleet capabilities, better matching of the truck used for certain routes as well as increased use of higher capacity trailer trucks and the higher capacity trailer trucks is better utilized in the hub…

Okay. Thank you.

Thank you. And the next question comes from [indiscernible] with Neuberger Berman.

[Non-English]

Thank you for your question. And yes, we did have a plan, and the plan expires on May 21. Right now we don't have a new plan or we didn't intend to have a new plan to be put in place on price - on share buyback. However going forward, we will continue to observe what the market movements are and opportunistically buyback shares.

Thank you. And the next question comes from Tsein Ho [ph] with TH Capital. Please go ahead, Tsein Ho. Your line is live.

Sorry I was on mute. So given the trend or the saturation of oil and gas price increase as well as some kind of a labor cost increase, what is the company's outlook on a full year operating margin. Thank you.

Yes. Thank you Tsein for the question. Your observation is correct, the costs are increasing and which again puts us in an even heightened alert to manage our efficiency gains. The profit margin however is not only affected by the cost increases. Of course we've talked about the entire revenue mix is shifting. The entire profitability will be in our estimation heading towards decline because of the increased competition. And we do believe that incentivize incremental growth is important to us. Now this comes to back to our overall strategy. We are not at the time in attaining profit as our primary goal. The market is growing, the growth potential is huge in the next 2 to 3 years. Our economy of scale and our competitive advantage is well demonstrated in growing our volume and there will be time when the market growth stabilizes than we would expect our profitability gain in the future. I hope that gives you a good sense of our focus on the volume growth. Of course without sacrificing our quality of services and maintaining still healthy, better than peer increases in the profit area but still focusing on volume growth.

Thank you, Huiping.

And the Chairman will have comments to add as well to your question.

Yeah Chairman pointed out that again scale provided us greater advantage and competitiveness in rising - in an environment of the rising cost. The overall focus on automation or our focus on increased use of our own fleet will be effective and as we saw in the first quarter as well in going forward in offsetting the cost of increase in labor cost and oil cost. And he added that the fact that all these costs are across the entire industry and it's not ZTO specific. In that regard our scale, our level of automation provided us competitive edge against our peers in terms of our ability in offsetting cost rises.

Thank you. [Operator Instructions] All right, as there is nothing else at the present time. I would like to return the call to Sophie Li for any closing comments.

Thank you operator. In closing on behalf of the entire ZTO management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may replace your lines.