ZTO Express (Cayman) Inc
HKEX:2057
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ZTO Express (Cayman) Inc
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Hello, and welcome to the ZTO First Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I now would 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 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 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 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. Meisong?
[Foreign Language]
Now let me 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 volume growing to 1. 6 billion parcels, and an adjusted net income of RMB 757 million. In survey results released by the State Post Bureau, we again ranked 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 the quality of our services.
During the first quarter, we further increased the utilization rate of digital waybills to 94% and incentivized the incremental growth effectively. Benefiting from growth in the broader market, we continue to improve capacity and efficiency for both sorting and transportation by installing more automated sorting equipment and adding high-capacity trailer trucks to our fleets. At the same time, we closed a certain number of indirect partner outlets to reduce the number of layers in our network to improve both effectiveness of execution and profitability across the network. We are also investing in our IT infrastructure to create integrated operating systems and mobile applications to facilitate data-driven connectivity and the collaboration between our employees and network partners across our ecosystem, including headquarters, sorting hubs, delivery outlets and last mile.
We got off to a good start in 2018, and as we head into the second quarter, we are seeing a new wave of growth across the industry. As for our core express delivery business, we will sharpen our strategic focus on building a strong and scalable platform that is well integrated with numerous nimble and responsive ways in which to serve end customers.
First, we will devote further resources towards improving service quality and customer satisfaction. Second, we will continue to invest in R&D, automation, smart equipment, infrastructure and network structure optimization. We will rely on better route planning and transportation resource allocation to enhance transit capacity and efficiency. Third, we will provide a [indiscernible] of automation to our network partners while establishing and relying on a set of transparent pickup and delivery [ extenders ] to ensure proper allocation of profit. This will allow our last-mile couriers to receive competitive compensation and ultimately drive growth and the stability of our network.
Lastly, we will further implement recent changes to our organizational structure at company headquarters and at sorting hubs to provide accountability and flexibility, drive proactiveness and to facilitate better coordination. This will help cut down red tape, improve execution and better resource utilization. All of these initiatives require a progressive information and technology platform. Last year, Zhongtongji Network, our IT subsidiary, was recognized as a High and New Technology Enterprise, which is a result of our commitment to transform ZTO into an advanced technology-driven enterprise.
The higher-than-expected growth in the first quarter reflects the best growth potential of the express delivery industry in China. The top 8 express delivery companies in China now accounts for 80.7% of the market. ZTO just celebrated its 16th anniversary and as a late-comer and now a leader, we are excited about the growth opportunities and we have an equally strong sense of urgency and responsibility. We will continue to grow our business through a high quality of services while generating healthy profits. The Chinese express delivery industry is like a marathon, and we intend to do our best to run fast and go far.
With that, I will now turn the call over to Huiping, who will go over the financial results in more detail.
Thank you, Lai Song. Hello, everyone. Good morning, and I'm glad to go behind the numbers to explain what is taking place in our business. Please note that all numbers are in RMB unless specifically mentioned, and our percentage refers to changes from prior measuring period unless otherwise specified.
During the second quarter, we saw good results as ZTO continued to build out our business platform to scale and to quality with 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 is significantly lower than the volume increase of 36%.
In addition, we retired older vehicles and added more than 100 high-capacity, line-haul trailer trucks to our self-owned fleet. Quarter end number of self-owned trucks decreased year-over-year by 100 to 3,500 yet 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 RMB 3.54 billion. We started consolidation of the recent acquired freight forwarding business, what we call COE or [ COE ] in the fourth quarter of 2017. COE contributed revenue of 293.3 million during this quarter. Excluding COE, our core express delivery 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% the same period last year. Third, the digital waybill unit parcel have -- contains a lower per bill price than paper. And then also associated with waybill, we have incentives driving incremental growth. The unit price per parcel decline are well within our reasonable expectations.
Cost of revenues rose to 2.51 billion, an increase of 33.4%, primarily due to increase in line-haul transportation, sorting hub operation cost, accessories and other costs. This also includes 283.7 million in freight forwarding cost as a result of the freight forwarding business acquisition during the fourth quarter last year.
Now going into more details. Sorting hub operation cost rose 23.4% to RMB 686.4 million. As a percentage of revenues, sorting hub operating cost accounted for 19.4% of the total cost, which is a decrease from 23 -- 21.3% in the same period last year mainly as a result of the increased level of automation in our sorting facilities, which absorbed a portion of the continuous increase in labor cost per headcount.
Cost of accessories increased 42.1% to RMB 88.7 million, which was in line with the increase in the sale of thermal paper used for digital waybill printing. Other costs increased by 124.6 million to 269.8 million mainly driven by an increase in dispatching cost associated with serving larger enterprise customers and increases in tax surcharges as well as incremental IT-related expenses.
Gross profit rose 41.3% to 1.03 billion, and gross margin increased to 29.1% when compared to the same period last year. The increase in gross margin was mainly attributable to the savings and efficiency gains in the transportation and sorting costs. Total operating expenses were 333.7 million compared to 73.9 million in the same period last year.
Now taking a closer look. We saw that SG&A expenses decreased significantly from RMB 162.0 million to RMB 415.6 million. Included in the SG&A, there are an increase in share-based compensation expenses from 0.3 million in the first quarter of last year to 199.7 million in the first quarter of 2018. This amount is associated with a change in how we grant our incentives to the employee and how we accounted for it in the quarter-over-quarter. SBC issued in 2017 has a vesting period over 12 months or 3 years. While in the first quarter of 2018, employees aren't -- incentives are accounted in the same quarter, which is the first quarter 2018. So therefore, there is a significant increase.
Now moving on to income from operations. Income from operations was RMB 698.4 million, an increase of 6.3% from the same quarter last year. In the first quarter, net income rose to 557.5 million compared with 502.9 million during the same period last year. Basic and diluted earnings per ADS were both RMB 0.78 compared to RMB 0.70 during the same period of 2017. Adjusted net income surged to 757.2 million, a significant increase from 503.1 million during the same period last year. EBITDA was 899.4 million compared with 804.8 million during the same period 2017. Adjusted EBITDA was 1.1 billion, an increase from 805 million during the same period last year.
Net cash generated from operating activities was 214.2 million compared with 331.5 million in the same period last year. Net cash provided by operating activities reflected 119.3 million of short-term financing provided to our network partners for general operating activities and an estimated 160 million of income tax incurred for 2017 paid during the first quarter of 2018, which will be refunded from tax authorities. The difference in the amount paid and the refund is due to income tax applicable for higher and new technology enterprises, which is the favorable rate at 15% compared to the 25% statutory rate. As of March 31, 2018, the company had approximately 8.93 billion in cash and cash equivalents and short-term investments, a decrease from 10.65 billion at the end of last year due to the above-explained reasons.
Now turning to our guidance. For the second quarter of 2018, we expect parcel volume to be in the range between 2.02 billion and 2.06 billion; adjusted net income to be in the range of 1 billion and 1.05 billion, representing a year-over-year growth rate of 35.3% to 38% in volume and 36.9% to 43.8% in adjusted income, respectively. This represents management's current and preliminary view, which is subject to change.
Now we have concluded our prepared remarks. [Operator Instructions] Operator, please open the line for questions.
[Operator Instructions] And the first question comes from Ronald Keung with Goldman Sachs.
Two questions. Firstly, can you just go through how you see the parcel market is trending particularly given the reacceleration that Lai Song just mentioned? Given our volume guidance from last quarter, 28 to 30; this quarter, 35 to 38, so given that, Lai Song, you're -- the whole 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, Tmall contribution in parcel terms and in terms of the new sort of rising platform, [indiscernible]? How much is that in your parcel contribution? And how do you see growth between these major platforms trend? [Foreign Language]
[Foreign Language]
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 Tmall 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 Tmall and [indiscernible] and the like.
And the next question comes from Nicky Ge from China Renaissance.
[Foreign Language] 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?
[Foreign Language]
The direct shipment route connects the pickup service outlet to destination sorting hub, and the direct shipment business has been developing rapidly in 2017. And in the first quarter of 2018, we began with about 3,700 shipments per day. There were nearly 200 routes that shipped from the pickup location directly to the sorting hubs at the destination. It accounted for 5% of the total routes. And before 2017, only some of our major outlets like the one in [ Wu ] had a direct shipment businesses. Now let me clarify that. It is not the case where every delivery company is capable of running direct shipping models effectively or efficiently. First, parcel volume needs to reach a certain level. It needs to be large enough to fill the trucks on each route, and we normally make arrangements based on route, truck utilization 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...
[Foreign Language]
Direct shipping not only helps our partners reduce transportation cost, improve express delivery efficiency and it also reduces parcel damage by reducing sorting frequency and also increase headquarters' profits.
And the next question comes from Vivian Tao with Citi.
[Foreign Language] So my 2 questions, the first one is on ASP. We have noticed the ASP has declined from 2 -- RMB 0.23 to 2 -- slightly over [ RMB 2 ] in the first quarter. Just wondered what was the cause for that. Can the management please provide some further breakdown how much of that decline attribute to the mass weight of the -- average weight of the parcel and how much was attributable to the direct shipment, et cetera? The second question is on the cost associated with serving the enterprise clients. We have noticed this cost has declined to 60.5 million in first quarter this year and the amount was 148 million in the fourth quarter last year. Just wonder what was the reason that caused this decline.
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 break down, the waybill 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 factor involved. So the cost of serving large clients did decline.
And the next question comes from Eric Zong with Macquarie.
[Foreign Language] Okay. So I will translate for myself. So my question is about the company's medium-term strategy. So if we're to strip out the tax impacts for second quarter, so according to the guidance, the second quarter [ unit ], net profit should see a small year-on-year decline. So I was just wondering if you could share with us your strategy going forward because I noticed that a few competitors are aggressively gaining market share with attractive pricing strategy. And also, their [ unit ] net profit has declined like in the first quarter as well. So are you considering a more aggressive pricing strategy to get market share as well? Or that means -- so that perhaps means that you may allow -- maintain a flat [ unit ] net profit going forward, but however, your earnings growth can be flat as well.
[Foreign Language]
And let me, first, translate for the Chairman. Yes, your observation is correct that we have guided a lower profit growth than volume growth. And now our strategy, again, to reiterate, 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 [ Zhongtong ], 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 comments 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.
[Foreign Language] Okay. My second question is on CapEx for the first quarter. So I saw there is a hike in CapEx [ in PPE ]. So I'm wondering what's the reason behind that CapEx hike.
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 investments, 7 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 3.5 billion to 4 billion total CapEx spending. We will be increasing that to 5 billion to 5.5 billion driven mainly by, one, increasing of our overall automation capability as well as increasing and extending 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.
And the next question comes from Edward Xu with Morgan Stanley.
[Foreign Language] The first question is about your margin. We see that your GP margin actually improved year-on-year, which I think is a positive surprise given that the GP margin for your peers generally declined in the first quarter. And then especially, this is given high oil price and also the consolidation of the COE in your P&L. So can you give us a more detailed explanation on how you achieved this margin improvement? And second question is I found that the share-based compensation was booked at 200 million in the first quarter, while this item was more evenly distributed in the 4 quarters. So -- which means that -- do you have more share-based compensation to be booked in the next few quarters? Or is this just over?
Thank you, Edward, for your questions. Yes, the GP margin performed quite well this quarter. Now we have pointed out that the main driver for our efficiency gains are coming from 2 aspects: 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 has decreased significantly. Now a larger driver, of course, as you can see is in our transit operations. If I may point out first, transit cost 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 cost was out of control. And since then we started to focus more on balancing the need of third-party transportation capability 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 cost, but yet still we do -- as we are building our own capabilities, we still incurred higher than what is should in third-party transportation cost. So if you were to break down the incremental gain that we have in about close to 0.20 of this year in reduction of the transportation-associated cost, partially if -- if maybe half of that is attributable to the current implementation of 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 hubs that is designed for quick in and outs because it's a unique design that we have. The space in between are much wider so that the trailer trucks could go in and out quickly. And then also another point in terms of the transportation, the truck -- the trailer head to the trailer itself, the ratio are also being looked at so that we are improving the quick change and switch. So specifically, right now the ratio between the head and the trailer is just a little over 1.05, and our goal is to increase that ratio to 1 head to close to 2 heads. So therefore, it could allow us to quickly switch trailer and switch parcel shipment and increase efficiencies. Now you mentioned about the gas cost. And what we have done in that area is to increase visibility and also centralize control of payment and accounting. Each of the truck uses the gas card, and the gas card is driven by data connected in our back office where we have visibility to the usage of per mile -- usage of the gas per mile. So that gives us quicker response to address any of the issues that may come across in the usage of the gas against the benchmark that we have set in our overall system. And looking forward, we will continue to improve the efficiencies. However, the increment will come from additional recalibration or, if you will, in our overall fleet structure to drive further efficiencies. But it shouldn't be as significant as you see in the first quarter because, again, the factors that I mentioned about the first quarter in 2017, those numbers were unusually high. Now to the second question relating to share-based compensation, yes, the share-based compensation for 2017, the cost in total is 130 million and that cost is spread over 12 months according to the policy we set against those shares issued to the employees because they need to have 3 years to vest. The 2018 first quarter charge of 199 million is a one-time charge because it's largely driven by services, the contributions made by those employees in 2017, and they have attained the compensation. So going forward, in the second quarter, we should see a remaining about close to 20 million only and the rest of the quarter in 2018 of 10 million associated share-based compensation cost. Thank you, Edward.
And the next question comes from Baoying Zhai with Neuberger Berman.
[Foreign Language]
Thank you for your question. 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 buy back shares.
And the next question comes from Tian Hou with T.H. Capital.
[Foreign Language] So given the trend or the situation of oil and gas price increase as well as some kind of a labor cost increase, what is the company's outlook on the full year operating margin?
Yes, thank you, Tian, for the question. The -- 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 the incentivized incremental growth is important to us. Now this comes 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, then 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. And the Chairman will have comments to add as well to your question.
[Foreign Language]
Yes, Chairman pointed out that, again, scale provided us greater advantage and competitiveness in the rising -- in an environment of a 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 and 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 surprises.
[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 has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.