ZTO Express (Cayman) Inc
HKEX:2057
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ZTO Express (Cayman) Inc
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Good day, and welcome to the ZTO Express Second Quarter Financial Results 2022 Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Sophie 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 the 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]
[Interpreted] Hello, everyone, and thank you for joining us today.
In the second quarter of 2022, we still delivered a parcel volume of 6.2 billion, which increased by 7.5%, expanding our market share by 2 percentage points to 23%. The adjusted net income grew 38.2% to CNY 1.76 billion. Despite pandemic impact and weaker economic outcome, ZTO delivered strong performances in both market share and profits.
While we strictly implemented prevention in a couple of measures, we actively responded to the nation's call of stabilizing and growing the economy without compromising safety. Being among the first to resume operations, we proactively adapted our strategies to seize market opportunities. Through a balanced approach to parcel volume growth and profit expansion, we are actively advancing our long-term strategy.
Firstly, we continue to focus on expanding our market share through comprehensive means. First, taking advantage of early resumption of operations, we restored uninterrupted parcel volume in COVID-affected regions and enhanced our brand resonation and reputation with improved customer stickiness.
Second, we leveraged insights from in-depth analysis provided by our digital platform to discover execution flaws that underpin the low or negative growth problems. We reexamined the cost composition against the effectiveness of pricing structure to stimulate incremental volume.
Third, we aligned the resources towards varied demands from supermarkets to establish new business. For example, we increased our build-out of [ 2 stores ] to serve customers with our time-definite product offerings and enhanced our fulfillment capabilities in specialized products and services. At the same time, we improved profitability by implementing process management measures.
First, we conducted thorough reviews of KA customer accounts and eliminated unjustifiable loss-making contracts in accordance with the principles of granting fair and transparent policies for network partners and outlets.
Second, we further enhanced our real-time data monitoring and analytics of cost enterprising for sorting centers and line-haul routes. This allowed us to optimize route and shift planning in a timely manner, which improves resource allocations around automation and transportation equipment as well as human resources.
Third, we furthered implementation of standardization in operating procedures across all sorting centers. Through clearer definition of job responsibilities and the standardized operating protocols, we were able to better align compensation and incentives to drive labor productivity.
Fourth, we continued our efforts to delayer our network by reducing the number of stops a parcel makes as it flowed from end to end. Helping others to process parcel aggregation or enabling destination segregation at earlier stages of sortation are examples to achieve improved capacity utilization and cost efficiency across our entire network.
Stepping into the second half of the year, while we insist on production safety, we will continue to focus on high-quality growth to widen competitive lead, to strengthen differentiated capabilities and implement the following work priorities. First, continue to improve the efficiency of our transit platform. We will standardize every step with digitalization that allows tracking, measuring and evaluation in order to improve the utilization of resources.
Second, further implement partner network management. We must ensure that couriers have access to full market pricing associated with incremental volume so that they are incentivized to acquire new customers. We can assist our network partners to install capacity that meets on-site demand. We can lend our capacity to help network partners and share their workload and enhance the ability to sort for final instead of interim destination.
Third, accelerate the development of last-mile presence and consolidate last-mile resources to further reduce pickup and delivery costs. We will continue to improve our service quality that meets diversified and personalized customer demand and improve customer loyalty.
Fourth, further refine KPIs and improve rewards and recommend mechanisms for quality of services. We will tackle root causes of service quality issues all throughout the stages of pickup, sortation, transportation and delivery, aiming to improve timeliness and minimizing problems, including parcel damages.
Fifth, strengthen human capital development by talent attracting, retaining and faster track promotion for a wide range of functions or positions. We will ensure our talent reserves are sufficient to support our business development. We will further emphasize performance evaluation of our provincial general managers and sorting center managers under a lower-risk ranking elimination footwork.
Sixth, continue to expand the businesses in 5 key logistics segments within our ecosystem, namely LTL, cloud warehousing, international, cold chain and [ 2T ]. Supported by financing and commerce, we aim to develop cross-selling information technology integration and sharing of managerial know-how. We aim to establish stand-alone competitive advantage by each of the segments while cultivating logistics advantage that are built around comprehensive logistics service capabilities.
Even though the short-term outlook is filled with uncertainties due to pandemic and other external factors, we believe that in the mid to long term, the logistics industry is resilient and has great market potential. We believe that longer-term positive prospects and room for upside are still in place.
ZTO's consistent strategy is to achieve continuous market share expansion and profit targets while maintaining high quality of service and customer satisfaction. Our track record has proven our competitiveness in terms of strategic direction and execution. For example, fairly and transparently aligning interest among our network partners, simultaneously attaining growth in parcel volume and profit, continuous iteration of technology and information systems and its application and strengthening our diversified logistics ecosystem in an orderly manner.
Looking ahead, we're focused on our mission with a strong sense of urgency. We will be left behind if we don't progress. We will be the best we can. This moment has opportunities. Support and cover of our network partners and accelerate the widening of our competitive [ edge ].
Now let's have Ms. Yan to take us through the financials.
[Foreign Language] Hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, our numbers quoted are in RMB, including changes referring to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow are posted on our website, and I'll go through some of the highlights here.
In the second quarter, despite the headwind caused by COVID outbreak, ZTO delivered solid growth results. Parcel volume increased 7.5% to 6.2 billion, advancing the quarterly market share by 2 points to 23%. The adjusted net income grew 38.2% to CNY 1.76 billion. Total revenue increased 18.2% to CNY 8.7 billion. ASP for the core express delivery business increased 10.5% or CNY 0.13. Normalized competitive environment supported and helped maintain second half 2021 price increases. In addition, our internal efforts to optimize customer base is also generating -- hello?
Operator, can you check if everybody is found -- is okay?
Yes, you may proceed.
Thank you. I'll just repeat the last sentence. In addition, our internal effort to optimize customer base is also generating meaningful results. Total cost of revenue was CNY 6.5 billion, which increased 14.2%. Overall unit cost of revenue for the core express delivery business increased 6.2% or CNY 0.06.
More specifically, line-haul transportation costs per parcel increased 2% to CNY 0.49 as a combined result of surging fuel cost and lower-than-expected volume offset by cost productivity gain through usage of higher-capacity trailer trucks, improved load rate and better route planning. We estimated the negative impact from fuel cost hike was CNY 0.04 per parcel for the quarter. Unit sorting costs increased 9.1% to CNY 0.30, driven by increased labor salary and higher depreciation and amortization costs associated with a higher installed base of automation equipment.
Gross profit increased 31.6% to CNY 2.2 billion given increased volume and ASP against still relatively stable cost structure. Gross profit margin rate increased 2.6 points to 25.4%. SG&A expense as a percentage of revenue dropped 0.1 points to 5.3%, demonstrating a lean corporate cost structure. Income from operations increased 36.4% to CNY 2 billion, and associated margin grew 3.1 points to 22.9%. Operating cash flow grew 95.7% to CNY 3.8 billion. Capital expenditure totaled CNY 1.5 billion.
Being an increasingly integral part of the economic revitalization and daily livelihood, the express delivery industry has shown strong resilience throughout lockdowns and facing economic uncertainties. We believe that the industry's long-term growth potential and value prospects remain strong. By enhancing core capabilities, calibrating revenue mix and refining cost management, ZTO continues its consistent strategies to achieve sustainable, high-quality growth. Furthermore, with continued efforts on developing integrated logistics ecosystem, we aim at providing comprehensive logistics services to meet diversified and tailored demand, forging synergy and enhancing our leading position.
Based on current market and operating conditions, the company maintains its previously stated annual volume guidance, which is in the range of 24.96 billion to 25.86 billion, representing a 12% to 16% increase year-over-year. These percentage increase estimates, meaningfully above anticipated industry average, reflect company's commitment to further our growth strategy and confidence in our ability to deliver despite macro uncertainties that still exist in the marketplace. These estimates represent management's current and preliminary view, which are subject to change.
This concludes our prepared remarks. Operator, please open the call for questions. Thank you.
[Operator Instructions] Our first question comes from Lu Xu with Citi.
[Foreign Language] Now let me translate my question. My first question is regarding the service operation in Yiwu. According to the latest local COVID measures that was announced last night, you lifted the closed-off management in some regions. It also mentioned that the logistics, the e-commerce and the enterprises shall resume operations in an orderly manner. Could the management kindly share more color on the implementation details? For example, to start with, what region, whether it requires access pass, how should we anticipate the overall recovery pace? And when would the parcel volume return back to normal? And what was the parcel volume impact during the prior 7-day service suspension period in Yiwu?
And my second question is regarding the ASP trend. So the whole industry overall, ASP were relatively stable this year even during this low season. And aside from previously mentioned some internal customer base optimization, and what do you think are some like external factors behind that such as policy, high fuel price, the COVID resurgence or some other factors? And going forward, how do we foresee the ASP trend in the third and fourth quarter or even in longer period? And do you see any short-term price pressure from the recent domestic fuel price jump and the service resumption in Yiwu? And meanwhile, some of our peers slightly increased the ASP in Yiwu at end of July, and [ we think then ] what was the logic behind that and whether we would follow their steps going further.
[Foreign Language]
[Interpreted] Thank you for your question. First of all, relating to Yiwu, indeed, started the 11th of this month, there are lockdowns. And it's gradually resuming. However, for express delivery businesses, we need to stay coordinated with the government's inspection because it is a concerted effort across all industry as well as logistics. Some of our outlets have already started picking up packages. So it's a good indication that things will return to normal. Yiwu represents about 10% of our total volume. So it's about 6 million to 7 million packages a day.
Now the question regarding pricing. ZTO has always had a level of premium against all the other Tongda pricing. So we think that it has something to do with the recent price increases. And our price is already slightly higher, so we are not preparing or anticipating any changes at this moment.
Second half of the year, we think that the overall theme is stabilizing for the pricing. Typically, in the industry, there is a normal variation from month to month. For example, from September -- from August to September, there is about 6 to 7 points increase, and then from September to October and so on and so forth all the way through November. There's increase in volume demand, and it's associated also with the price gradual increase. So overall, for the second half of the year, we think the price will go up slightly for the fourth quarter -- third to fourth quarter. We'll hike up about 20 points or so. So it's stabilizing increases.
And if I may supplement to the longer term, the industry is with significant growth potential because it is indeed part of the day-to-day life with varied channels of e-commerce development, for example, video streaming and all that. So we think that the overall pricing will continue to stabilize And being such a low starting point for express delivery because it's associated largely with e-commerce costs being the largest concern, going forward, we think the upper increases is very much likely.
Our next question comes from Tian Hou with TH Capital.
[Foreign Language] The first one is I saw the margin in second quarter was really good, much better than all the quarters in the last year. So earlier this year, management did give the guidance for the full year profit. So I would like to hear more about the margin trends for the second half of 2022. That's number one.
Number two is among all the parcels, what's the portion from e-commerce? And as we grow into new business, so maybe e-commerce portion is going to be less than before? And then also for the -- among e-commerce, how -- what's the portion of -- from the new platform such like TikTok? Okay. That's all my questions.
Thank you, Tian, for the question. Let me try to answer the questions. First question relating to the margin, what are the good reasons for the margin increase? As we stated earlier, the price for -- first of all, we are able to sustain the price that was increased from the past 1.5 years. And because of the competitive environment, it's stabilizing. And for the second half of the year, we think because the price hike was started in second half of last year, so the relative ASP increases will be tapering off. And that leads to the comment on profit. Profit, second half of the year relative to the first half of the year, the pace of expansion will be slower, certainly, because of the base [ ASP ].
And then if I may comment a little bit more on the qualification of -- behind your question, although I don't think I can give you the specific numbers, the revenue increase is driven by ASP, we've explained. But I think most importantly is what we are doing on the cost side. The cost side of initiatives are including addressing specific loss-making transactions, improving our mix and advancing our volume so that we could utilize all our improved utilization of our capacity.
So all these are intact and in place. And with the labor cost increases, we have automation. We have better route planning so that the transportation cost will also be reduced. And I think if you recall, we had addressed the overall cost productivity gain. It really is associated with our total sort of delayering or shortening the distance from package flow -- for package flow. So in other words, reducing the number of sortation for a particular package as it goes through all the stages of the transit. So these are structural improvements that will give us longer-term price productivity gain. And third quarter, fourth quarter, the businesses so far, what we have observed is still relatively stable. So that answers your first part of the question.
Second part, relating to the e-commerce as a proportion of our total business. It has been stable. And us, ZTO, being the largest player in the express delivery industry, we have maintained a high level of market presence. And that applies the same to existing traditional or newcomers into the e-commerce space. So our proportion is consistent with our total market presence.
Our next question comes from Qianlei Fan with Morgan Stanley.
[Foreign Language] So I'll translate for myself. I have 2 questions. The first question is about CapEx and daily capacity. So considering a slowdown in industry volume growth, do you have any adjustment or new guidance on the full year CapEx? And also, what's the daily handling capacity by the end of the year?
And my second question is about the cost. So we have seen that if we exclude the impact from inflation actually in the second quarter, unit cost optimization has continued. So wondering, is there any guidance on cost efficiency improvement in the second half of the year?
So let me answer the question for the CapEx. Indeed, the -- our goal and target for growth is significantly above the industry average. And because we -- it's reflected in our strategy, we believe that growing volume, growing our market share is crucial for -- considering the nature of our business, right? It's a scale-driven business. So our CapEx spending, although with that said, is very much managed against the demand and what we have anticipated the overall growth, we don't want to overinvest ahead of the time too much, but -- yet we don't want to stay behind because we are, with our focus, growing our volume.
So the current CapEx goal is still kept somewhere around CNY 9 billion. We're not going to exceed that. And then I think the likelihood is probably somewhere around CNY 6 billion to CNY 7 billion. But we want to make sure that we capture the market opportunities. So this range is pretty wide. However, it is going to be managed closely.
The second part of the question is, indeed, we have put in a lot of effort in addressing our cost productivity gain. With that, also considering the second half of the year, the seasonality, the volume changes, we think that the cost will continue to have leverage.
[Foreign Language]
So let me further translate for the Chairman. It is consistent to what I had just described.
[Interpreted] Relative to the first half of the year because the volume is below our expectation, our scale leverage is not necessarily fully demonstrated. We indeed have significant capacity preparedness. And in the second half, as the volume for the whole industry, which is anticipated higher than first half, we think our scale leverage will further demonstrate and the cost per unit will decrease.
Our next question comes from Thomas Chong with Jefferies.
[Foreign Language] We have seen very impressive earnings in the second quarter. I just want to get some color about our investment strategies. How should we think about the investment in new initiatives going forward? And would that -- would we use some of our earnings to invest for the future?
And my second question is about our market share. Given that we have increased our market share by 2 percentage points during the quarter, just want to get some color about our long-term target in terms of the market share gain story.
Okay. Thank you for your question. The first question relating to our investment. I think I understand that you're referring to both our new products within our core businesses as well as the investment perhaps in our ecosystem. Now I will just answer to those 2 areas of investment strategy.
The first part, we think that to differentiate ourselves from the rest of the Tongda, we are and we have been investing in time and energy in developing differentiated products to allow consumers, our customers to have a different experience and also allowing them to meet -- to receive individualized services for their diversified needs. And our capability of fulfilling these commitments are requiring investments. So indeed, that is part of our strategy and plan, although the volume as of now is not significant. So we are carefully and we are prudent in investing on those parts of the new capabilities development.
And the second part, to our ecosystem. The ecosystem, if you look back to our past, our approach has always been rather -- it's an extension of our existing capabilities and resources because our goal is to fully utilize or double and triple usage of our existing investment and existing resources. So the growth of our ecosystem is also very coordinated, and it has its own pace.
If you're referring to invest in new initiatives that could add to our existing capabilities or capabilities that are missing, then it refers to our normal M&A businesses. So yes, we will continue to look and we will continue to see based on the opportunities that are there for us to expand our comprehensive capabilities. And then we will look inward to say what do we have, what we don't have. So that's all part of the normal M&A, but we're not saying that we will be deviating from our traditional, our established way of investment discipline.
Market share, longer-term goal, as we had anticipated the overall potential in the industry, the growth prospects, we think that we are in a very good position to reach 30% or even 40% of the overall market in the next 5 to 10 years. Again, that's a very loose range. However, as we mentioned, it is a scaled business. Scale leverage is important. And as the demand is there, as the growth potential is there, we have the best competitive advantage. We are in the better -- most favorable position to achieve a higher market share, and that is indeed what we are trying to achieve. I hope that answers your question.
Our next question comes from Frank Yip with Daiwa Capital.
[Foreign Language] So 2 questions, first related to the more longer-term industry parcel volume and the ASP growth target. And the second one is related to the -- do we consider to do the dual primary listing on the HKEX.
[Foreign Language]
Let me translate for Chairman the first question, in the next 2 to 3 years, the growth of the industry.
[Interpreted] So we are -- we remain confident in the entire industry's longer-term growth because the potential is deep and the ability to expand is still very strong, particularly speaking the penetration into rural, agriculture as well as manufacturing opportunities are just starting to present itself. So we expect the industry will continue to grow, especially when you have this concentration in the top players continuing to increase. The scale and the leverage will further support and propel the growth of the -- the healthy growth of this industry.
The second part of the question relating to dual primary listing, including in the U.S., in Hong Kong. We have been researching, and I think the company has no hurdle. So therefore, it is an option for us to achieve such in due time.
[Foreign Language]
[Foreign Language]
Let me translate.
[Interpreted] Our overall view is that industry pricing will be stabilizing and slightly and gradually increase. It is permanent by its nature and the current development trend as the players -- as the market share becomes more and more concentrated. In other words, the pricing power will be there. We believe the pricing going higher and increasing is very much likely. It has a high probability of increasing.
Our next question comes from Lin Chen with JPMorgan.
[Foreign Language] I would like to have management to make a comment on the difference in the digitalization level with its peers, especially with its closest peers such as YTO or Yunda.
[Foreign Language]
[Interpreted] Relative to the other industry peers, technology has always been a core competency or a core focus of our business. We have invested consistently, and among the Tongda, we invest the largest amount. And also we are the most innovative. There are many applications of the technology uses are -- originated from ZTO. This year, we will continue to strive for this competitive advantages development. For example, the initiatives include, one, expanding our technology empowerment and extend that capability to our outlets, helping them carrying out more online and real-time management of their operations during their policymaking, financial analysis, are all done with digitized solutioning. So the -- and also it includes the end-of-the-line management capabilities, all the way extending to the couriers.
The second part, which is also a very effective initiative that is generating significant results for us, that is the -- what we call [Foreign Language], meaning we are focusing more on real time, more frequent, more in-time visibility to the data and -- so that we could find issues, find problems as soon as we can and resolve them as soon as we can. And this extends to all across -- it extends to -- across our operations, all the segments, including the sortation, the transportation, the route planning, the labor utilization, labor productivity and so on and so forth. And this will further our ability to gain productivity in all front. That is what we are -- I don't think we want to try to compare with all the other players because each has a different starting point and each has different resources and capabilities that is focused. They are doing well, and then some of them are what we are able to learn from, and some are that we are able to achieve better.
This concludes our question-and-answer session. I would like to turn the conference back over to Mrs. Huiping Yan for any closing remarks.
Thank you again for joining us for the call, and we look forward to speaking with you further if you have any more questions.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]