ZTO Express (Cayman) Inc. (ZTO) Q4 2020 Earnings Report, Transcript and Summary

Hello, and welcome to the ZTO Express Conference Call to Announce Fourth Quarter and Fiscal Year 2020 Financial Results. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sophie Li, Director of Investor Relations; with Meisong Lai, Director and CEO; and Huiping Yan, CFO. 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 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 a 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 upload 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. [Foreign Language]

[Foreign Language]

Thank you, Lai Song. Now, please let me translate first. Hello, everyone, and thank you for joining us today. The year of 2020 represented another milestone in ZTO's development. We maintained our lead in overall customer satisfaction and grew annual parcel volume by 40.3% over last year to exceed RMB17 billion, expanding our number one market share to 20.4%. 2020 was also an extraordinary year. We remained true to our Shared-Success philosophy, leveraging on our extensive coverage and brand recognition, leading scale and capacity, continuously improving operational efficiency, and trusted in the collaborative network partners. We maintained top rent [ph] to service quality, while growing volume rapidly. Amid the hard blow of pandemic, frequent changes in industry dynamics and a fierce price competition. We recorded RMB4.59 billion of adjusted net profit, demonstrating a highly differentiated quality of earnings compared to our worker’s markets here. ZTO's consistent strategy to accelerate parcel volume acquisition and expand market share while balancing service quality and profitability has been proven effective. First, we focused on building transit capabilities. On one hand, we acquired relatively large tracts of land for constructing comprehensive smart logistic parks with integrated operations such as in-warehouse processing logistic fulfillment. While enhancing the level of automation and the utilization, we are designing sets that are useful for coordinated, yet varied operational flows. We have increased the proportion of self-owned fleet, including high capacity trailer trucks and improved the engine-to-trailer ratio. We also better organized the use of third-party logistics to supplement our own fleet. On the other hand, we continue to enhance the development of IT technology platforms. In addition to the dramatic of upgrades of our existing operating modules such as Zhangzhongtong, Shenzhou, Galaxy and [BBP]. We achieved the new breakthroughs in areas such as user interface, process streamlining, new product innovation and ecosystem value proposition. With consistent capacity development, refined process management, economies of scale and favorable ETC policies during the pandemic, the combined sorting and transportation cost per parcel decreased to 14.3% year-over-year. Secondly, we continue to expand development on pickup and delivery and strengthened our last-mile capacity and service quality. While focusing on scale and the efficiency of transit and sorting centers, on one hand, by providing financing, technology support and operational knowhow, we helped our network partners who reached the capacity bottleneck or faced the challenges in managerial capabilities. Given the strength of the Group, we are able to modify subsidy policies frequently and appropriately to help, coping with highly competitive and consistently changing market conditions. On the other hand, for those risk segments and the negative growth or weak quality performances, we deployed a grade-based attention approach, which then quartermaster [ph] to locally adjust problems and implement improvement plans. Thirdly, we accelerated last-mile developments. Since its beginning in 2018, ZTO's last mile presence has been increasingly enhanced. By the end of 2020, we have more than 68,000 last mile posts, leading the industry. Last mile delivery methods other than door-to-door, such as the last mile posts have not only effectively reduced the handling load and profit pressure, but also provided movement for front-end customer acquisition. Meanwhile, the proactive trial and adaptation of the Express plus model provided valuable experience in supply chain approach based on IoT mindset, thereby strengthening connectiveness with our last mile consumers. As the commencement year of the 15th five-year plan, 2021 will also be an important year for ZTO to build brand value and recognition, expand and upgrade its services and its products, and establish collaborative ecosystem. While, carrying forward our recurrent initiative, we will focus on the following aspects. First, to ensure sustainable growth, we shall take on corporate social responsibilities, including operating in an environmental-friendly way and helping farmers and alleviating poverty. Our efforts are underway, such as new green packaging, upgraded vehicles that run on renewable energy, wind services to villages and the rural workshops, offer logistic solutions to help revitalizing rural economy and provide basic care for grass-root walkers. Secondly, we are optimistic on the growth prospects of the express delivery industry in China. Our top priorities are to solidify our leading position in parcel volume and further expand our market share. We will increase investments in infrastructure, not only for the expansion of our core express delivery business and the improvement of our transit efficiency, but also for organic yet rapidly developing eco advantages. We will attach equal importance to assist and reforming our network partner management to in-store, a cohesive match of capabilities between pickup, delivery and the transit operations. Price competition is likely to remain or even become more intense as it draws closer to an end. We will take responses and the flexible approach to policy making to effect active control on our risks and opportunities. We will accelerate the expansion of our last mile lock box and post the facility for express packages. Coupled with our increasing parcel volume, we aim to enhance our pickup delivery capability and manage costs. Through an express plus model, with openness to all, we thrive to seize opportunities under the emerging commerce development to establish stronger connection with our customers in the last mile. Adhering to our principle of shared success, we seek to inspire and enroll our loyal network partners to invest in the last mile opportunities and create long-term value that are win-win. Last, but not least, we will optimize our organizational structure and upgrade talent strategies, we have implemented our accountability system at a provincial and a sorting center level, where rights and responsibilities are assigned to the front liners. We are developing future leaders through multiple tech lines, with a survival of the fittest approach to performance in valuation backed by innovative technology tools. We seek to establish a culture of management that relies on digitized process, managing performance of people to direct results. During the Chinese New Year holidays, ZTO implemented an uninterrupted service initiative. With more than 97% of our direct-to-network partners and the tens of thousands of drivers, operators, and carriers remained on their posts, handling 140 million parcels for customers across the nation. ZTO Blue we're seeing anywhere. We deliver not only daily necessities, but also happiness and warmth to our customers. Our brand building was routed deeper with our differentiated products and services, allowing our customers to truly experience the difference and form unique recognition at heart. The recent launch of our integrated coaching and time definite service network will be a giant leap in our five-year plan of brand building strategy. We believe that our ecological deployment and the collaborative development will enable us to maximize the utilization of scarce resources, to provide differentiated and personalized services and products to our customers, and create compounded return for our partners and investors. As preventative measures became normalized for the COVID-19 pandemic, more and more consumer categories, including main brands are establishing greater online and offline presence, the online categories of food sold and the Internet shoppers demographic are spending and shifting to more diverse economic regions. Contrast to more disbursing or fragmenting digital sales channels, express delivery industry has become more and more concentrated and the leading group of players are also polarizing to stronger and weaker path. Almost a quarter of 2021 has passed and express delivery industry experienced unprecedented growth so far into the year. For ZTO, we focus more on a marathoners' seminar. We are merely 18 years old, while no one can predict precisely how the future will unfold, we can however think clearly of what we want and when, what spends we have to rely on and what direction and path we shall take. Journey begins beneath our feet and we are on our way. Thank you all for your trust and support. Now please allow Ms. Yan, to take us through ZTO's financial results.

Thank you, Chairman. 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. Detailed analysis of our financial performances, unit economics and cash flow are posted on our website. And here, I will go through some of the key highlights. Driven by a strong consumption demand post pandemic and our sound execution of strategies, we exceeded the high end of our volume target range by growing parcel volume 40.3% to over 17 billion of parcel for the year. The 4.9 billion incremental parcels in 2020 is industry number one and is greater than the total parcel volume we achieved for the entire year of 2016. Our leading market share further expanded by 1.3 points to 20.4%. The revenue increased 20.6% to RMB8.3 billion for fourth quarter and increased 14% to RMB25.2 billion for the year. Annual ASP for the core express delivery business declined by 20.1% for Q4 and declined by 20.2% for the year, which was moderate compared with industry peers. Price decline resulted from one: volume incentives to support our network partners to grow market share, while maintaining confidence and keeping the network stable; two, increased use of lower priced single sheet digital waybills; and three, parcel weight drop of 8% to 1.05 kilo for the year or 1.06 kilo for the quarter. Total cost of revenue increased 31.9% for Q4 and increased 25.1% for the year. Unit cost of revenue for the core business decreased by 12.1% for Q4 and 11.8% for the year. Unit transportation costs declined by 15.7% for fourth quarter and declined by 17% for the year, primarily due to increased use of self-owned high capacity trailer trucks. We also benefited from the favorable total waiver policy from mid-February to early May and also the decline in diesel prices. Unit sorting costs decreased by 12.4% for Q4 and 9.4% for the year as a result of higher level of automation and improved economy of scale. Gross profit decreased 6.9% for Q4 and 11.8% for the year. Gross margin - gross profit margin decreased 6.6 points to 22.5% for Q4 and decreased 6.8 points to 23.1% for the year, which resulted mainly from competition led ASP decline, partially offset by cost productivity gain. SG&A, excluding SBC, increased 9.5% to RMB418 million for Q4 and increased 13.8% to RMB1.4 billion for the year, mainly due to increased salaries, headquarter facility expenses and depreciation and amortization expenses. SG&A cost as a percentage of revenue remained low at 5.1% for Q4 and 5.6% for the year. Our corporate cost structure remained stable. Income from operations, excluding SBC, decreased by 13.9% for Q4 and 13.2% for the year. Associated margin declined 7.6 points for Q4 and 6.2 points for the year, which is narrower than the gross margin - the gross profit margin decline, because of positive SG&A leverage and increased other operating income, namely VAT super deduction, government subsidies and tax rebates. Due to the depreciation of onshore U.S. dollar-denominated bank deposits against RMB, the company incurred a foreign currency exchange loss of RMB82 million for Q4 and RMB127 million for the year. Operating cash flow was RMB2 billion for Q4 and RMB5 billion for the year, decreasing 9.7% and 21.5%, respectively. CapEx increased by 68.9% for Q4 and by 76.2% for the year, as we secured larger tracks of land for developing comprehensive logistic facilities, purchased more self-owned vehicles, and installed more automated equipment. As we further strengthen our infrastructure to support accelerated volume growth for the core Express business, as well as resource planning and development of our ecosystem, our annual CapEx plan would remain at a similar or a slightly higher level for 2020. The company announced a $0.25 dividend for the year for shareholders on record as of April 8th, 2021, representing a 30% dividend payout ratio, similar to previous years. Turning to our business outlook. As COVID-19 has been largely contained in China, we are confident to achieve our prioritized goal to accelerate market share gain. Considering the current market condition, the company expects the parcel volume of 2021 to be in the range of RMB23 billion to RMB23.8 billion, representing a 35% to 40% year-over-year increase. We are not providing earnings guidance given careful considerations for the level of uncertainties and the competitive dynamics in the marketplace. More importantly, volume growth and accelerating market share gain weighs much higher as we continue to maintain high level of quality of services and achieve appropriate level of earnings accordingly, relative to our competitive peers. Our track record has provided clear evidence that our earnings quality is among the top of the industry. The above estimates represented management's current preliminary view and are subject to change. This concludes our prepared remarks. Operator, please open the line for questions. Thank you.

[Operator Instructions] Your first question comes from Thomas Chong from Jefferies. Please go ahead.

Thanks, management for taking my pressures and congratulations on a solid set of results. My question is about the competitive landscape in 2021. Should we expect the landscape to be more moderate compared to last year? And on that front, how should we think about the ASP as well as the cost per parcel trend in coming quarters? And my second question is about the various initiatives that we may potentially pursue, in particular, any thoughts about the delivery in a community group purchase? Thank you.

[Foreign Language]

[Foreign Language]

[Foreign Language]

Thank you for your question, and let me translate for the Chairman. As you can see that we have experienced a very price competitive dynamic year, but as we go through the process, the lower-tier players are pretty much out of the picture. And even so, the top group of - with concentrated players with scale, are also showing polarized dynamics with the bigger ones bigger and more profitable, but the smaller ones not growing and also not making money, making losses. So everyone's positioning in the market among the top-tier players are very different. We believe that the Chinese market, especially the express delivery market will continue to grow steadily and by an official estimate by the year of 2025, the total volume will near double of current level. And that would mean that scale and infrastructure construction is crucial to our sustained growth. This year, we invested RMB9.2 billion in infrastructure, and it is consistent to our longer-term initiative or strategy to build strong capacity and also capability. The Chairman also mentioned that not only we are developing our own platform, scale and operational efficiency, we are also helping our network partners through financing, through management consulting to help them develop their capability of managing their businesses and also break through some of the potential bottlenecks in their facility and capacity. Now with all these investments, while the market continue to grow, we think the dynamics would be much more clear and within a reasonable number of period of time, our leading position will likely and make it much more stable for the competitive landscape. Express delivery business rely on scale. And when you mentioned - when you ask the cost per parcel, whether - what are the trends, in the near future or as we are currently working on the three network or three layers of our network approach, will further provide cost efficiency for ZTO. Specifically, in the past, as we surpass our competitors, the key advantage is within our better connection and more efficient connectivity between our sorting hubs. And today, as we develop volume, the origination network, the origination outlets are able to surpass the origination - bypassed origination sorting hubs and go directly to the destination sorting hubs. And we are seeing the number of sorting - sortation, the times of sortation has declined. The second layer of network is referring to the origination outlet, to the destination sorting center. And yet at the same time, we are also seeing more and more direct routes are opening up between the origination outlets and the destination outlets. With this more direct, more streamlined process, cost efficiencies will be further demonstrated. And also our consumers' experience will be improved because product - the packages will be traveling at a much faster speed. So timeliness will improve. With regards to the group buying, certainly, as we mentioned, the digital commerce has been evolving the competition for express delivery, will become end-to-end and not only just the platform capacity and capability. We've reinvested in building smart logistic, comprehensive logistic service parts, which will include LTL, co-chain, warehouse, not only because they each are synergistically related, but also the resource utilization could maximize value and provide differentiated product to our consumers or customers. Group community buying intersects with our last mile presence, which is leading in the industry. So we think there is great opportunity for us to capture the value throughout this new approach of commerce. Our last mile capability is not only in the post, in terms of number, but also from a penetration and coverage perspective is more advantaged compared to all the others. For example, the county coverage is over 92%, and our initiatives to further bring about our presence in the rural area into the villages are going to further provide access to any of these new coming, new forms of commerce because at the end, the consumers are there. Thank you for your question.

Thank you.

Your next question comes from Tian Hou from TH Capital. Please go ahead.

[Foreign Language] Two questions. One is from the market share point of view. I see a little bit shrinking than previous quarters. So how do we maintain our market share in 2021? What are some specific actions ZTO is going to take? That's the first one. Second is regarding the competition, it will be very hard to maintain the possibility, while we will have to deal with price competition. So what are some specific actions or strategies ZTO is going to take to balance these two very contrasted issues? That's my question. Thank you.

[Foreign Language]

Thank you, Tian for your question. Yes, we did notice the slight decline from quarter-to-quarter. And we think that the key reason is the eight to 10 points the improvement in market share by J&T, and it is - creating a dilutive impact on everybody. But we think that it's not a sustainable long-term trend. From our perspective, express delivery is still a volume and scale and an operating efficiency gain. Where we have continually invested in our infrastructure, our scale leverage has provided significant advantage to our balanced approach, in not only growing volume and expanding market share, while maintaining quality of services, but also achieving a high level of earnings. We believe our focus is on the longer-term in an infrastructure investment. This year, we are - we have achieved a historical high of RMB9.2 billion, and it will continue to increase for the next year. A stable network is the second key important factors for sustained long-term growth. The network partners, operating within a highly competitive marketplace, and they are still investing in their facilities. They are also working with us in our development of our network changes, where we are streamlining, we are de-layering. They are also working with us. And it's apparent, our network partners are much more confident in our approach and in our business to continue to lead. So our network is the most stable. And then thirdly, specifically speaking, when we issue network policies, it's also unlike any other. It's transparent, it's fair, and it is also in a highly competitive dynamic, much more in sync with the market condition. In other words, we are asking or designing our policy to be competitive compared to all the other competitors in the marketplace. We are not any better off or worse off, yet because of our operational efficiency. We are able to leave more room for our network partners. The longer-term growth of Chinese express delivery industry for the near-term is when we - as we see, around 15% to 20% growth annually, and ZTO's goal is to achieve 10 percentage points higher than the industry growth. With that pace, we believe, in 2021, our volume growth will lead us to achieve 22% at least of the market share. And we're still on our way to achieve a higher market share, and our goal set for 2022 is around 25%.

Thank you. Your next question comes from Ronald Keung from Goldman Sachs. Please go ahead.

[Foreign Language] We have seen the unit cost in 2020, where there was a big decline in costs, particularly there was toll fee exemptions in the second quarter, VAT rebate, social insurance exceptions. And so as we look into 2021, with these cost pushes, do we expect players to pass-through these costs and will - our ASP declines actually be less in this year versus 2020? And then my second question would be, we talked about logistics parks and kind of combining express LTL, co-chain warehouse and with a more comprehensive solution for our customers. I see that LTL is actually an associate that we own on a high teens stake. So - we have plans to increase our stake there, what's the plan for the LTL business? Thank you.

[Foreign Language]

Okay. Let me answer the first part of the question. The fourth quarter ASP decline is still largely related to the market competitive environment. We have seen that in the fourth quarter, given we've given our much more incentives for our network partners. For the full - for the fourth quarter, it's $0.25 - a decrease of a total of $0.36 and the decrease for - related to the network incentives was $0.25. And so, the cost side of the equation, certainly we've mentioned, we did experience policy benefit in the first quarter of this year, because of the toll road waiver and also there are some benefits from the oil price declines. But that is still compared to our own operational cost efficiency gains. We believe the cost competitiveness would continue to be hard [ph] going forward, aside from any of the policies or benefits in the marketplace. So going forward, we think ASP the trend is still very much related to the market condition. When we did say that the competition has been going on for a while, and each of the players' profitability and also their ability to grow, which largely dependent on how and where their network partners are investing. If not investing then, the end-to-end competitiveness will not be and - continue to be intact. So, the clear leaders are those who are able to maintain stable network, invest in the infrastructure and have strong infrastructure as well as further cost and scale efficiency gains. And for the second part of the question, the LTL business and all our other ecosystem developments are in a way very much organically in-sync. So, we developed our LTL business and then our cloud warehouse business. And today, we've decided that it's time for us to invest more in smart logistic operational parks, because of their inter-synergies that are being able to carry out by all our businesses. LTL business being one of the earlier exercises or earlier trials of our approach to a new adjacent business, and it's been doing quite well. It's been among the top five now with a very short period of time, only three or four number of years, it's attained its market position. And we think that, it will lead our approach of a synergistic development of our ecosystem businesses.

Thank you. [Foreign Language]

Thank you. That does conclude our time for questions. I'll now hand the conference back over for closing remarks.

Thank you, operator. In closing, on behalf of the entire ZTO management team, we would 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.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.