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 Third Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Sophie Li, Director of Capital Markets. 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; Ms. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, then Ms. Yan 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.
For further information regarding this and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law.
It 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. For the third quarter of 2022, ZTO delivered a parcel volume of 6.37 billion, which increased 11.7% year-over-year, expanding our market share by 1.3 points to 22.1%. Our customer satisfaction scores hit a new record, and our end-to-end [ time limits ] and 72-hour time [ definitiveness ] continuing to rank top among the peers. Meanwhile, we achieved RMB 1.87 billion of adjusted net income, growing our bottom line by 63.1% year-over-year.
In the third quarter, due to pandemic and other external factors, the overall growth rate of the Express industry decelerated. ZTO focused on being the [ best we can ] through wider implementation of KPI oriented and data-driven process management [indiscernible]. Not only did we enhance operational excellence, but also built revenues to realize opportunities as well as the systemic growth also. While ensuring the normalized pandemic preventions and controls, ZTO was able to win on both volume and price for the third consecutive quarter and further widened the lead over our peers in market share, service quality and profitability goals.
Over the past few quarters, we have achieved remarkable results in improving the operational excellence and earnings quality. First of all, by going through KA customer accounts and modifying corresponding network policy, we eliminated unnecessary loss-making contracts and at the same time, enhanced the competitiveness of our outlets. Second, with further refinement and a wider utilization of our daily volume, cost, profit dashboard tools, [ bringing ] the visibility at a parcel flow level, which allowed us to recalibrate cost of coverage and pricing implication, therefore, reduced [indiscernible] . Third, with further standardization of operating protocols, refined KPIs and optimizing digitization capabilities, we can now track and analyze transit and sorting process by segments with improved accuracy, therefore improved effectiveness of workship and design, [ thereby transit ] more timely, increased utilization of labor, facilities and transportation resources, reduced trailer packages and improved end-to-end [ time limits ].
The overall operational quality and efficiencies have risen. While optimizing our own operations, we continue to focus on empowering our network partners to improve their comprehensive parcel volume, thus stimulating market share gain. We have gradually extended our volume, cost, and profit [indiscernible] network partners. We have used real-time data to always encourage and assisted them in to [indiscernible] financial results. Stuck always with low and negative growth, for identifying and solving problems from bottom up and ultimately improve their market competitiveness.
We further simplified partner fee policies and made them more equitable, transparent and uniform, which have included incremental market share potential through interest alignment and resource sharing amongst pickup and delivery hours and effectively increase the customer acquisition and total profit at both marketing and fulfillment centers.
Ensuring the service quality throughout all stages of pickup, rotation, transportation and delivery is a precondition for expanding market share and increasing profits. In the past few quarters, we have continuously refined KPIs and improved rewards and reprimand mechanism and tackled, of course, these problems in a timely manner with integrated efforts from all key segments of the entire network.
In the third quarter, our leading Cainiao Index scores widened among peers, which [indiscernible]. Fourth quarter, thus far, the external factors, including dynamic situation continues [indiscernible] negative impact. Consumption level was lower than expectation, and Express industry's growth was under pressure. However, we have been continually focusing on following priorities around our primary goal of accelerating market share expansion supported by employing high-quality focus.
First of all, strict accountability for operational safety, pandemic prevention and a console to ensure the smooth flow of packages. Second, enhancement of network infrastructure capabilities in an orderly manner, particularly having always to plan an evaluation hub and delivery stations, which are [indiscernible] transit and sorting platform. Third, further implementation of network management tools, including those of last-mile policies, which without compromising the vested interest of the outlets owners ensures [indiscernible] direct access to market pricing [indiscernible] will hire new retail customers. Fourth, accelerated expansion of quality preference with diversified capabilities at these last mile posts. The goal will be on reducing the pickup and delivery costs and provide community services in addition to on-demand delivery to doors, therefore enrich last-mile consumer experience in store and home. Fifth designing and the promotion of eco-diversified products and services, which rely on our differentiated scale and quality advantage. For example, standard time-definite service to meet customized needs.
Looking ahead, the growth prospects of [indiscernible] is positive. The divergence of key players have gradually become obvious and clear. For the past 20 years, ZTO has [ filled ] and relied on its shared-success culture, innovative DNA, its network with stability and its unsurpassed scale and efficiency to stand apart from the rest. Coupled with increasing effort on management upgrade and rigorous work ethics, management ethics, we are confident to achieve our primary goal of accelerated market share expansion with improving service quality and profitability while sharing daily parcel volume that will exceed 100 million.
Now let's have our CFO, Ms. Yan, to take us through our financial results.
Thank you, Chairman Lai, and hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB, and percentage changes refer to year-over-year comparisons. Detailed 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 third quarter, despite the recurrence of pandemic shutdowns or restrictions and a weaker-than-expected economic outcome, ZTO delivered strong performances in both market share gain and profit expansion, both supported by improving quality of services.
Parcel volume increased 11.7%, which helped to expand our market share by 1.3 points to 22.1%, and adjusted net income grew 63.1% to RMB 1.9 billion. Total revenue increased by 21% to RMB 8.9 billion. ASP for the core express delivery business increased 9.9% or RMB 0.12.
While pricing became more stabilized, we continue to optimize our policy effectiveness by enhancing volume mix as well as helping our network partners and outlets to strengthen their competitiveness and profitability. Total cost of revenue was RMB 6.5 billion, which increased 11.6%. Overall unit cost of revenue for the core express delivery business increased 12.6% or RMB 0.01. More specifically, line-haul transportation costs per parcel decreased 2.2% to RMB 0.49, where rising fuel costs were offset by cost efficiency gain from increased use of high-capacity trailer trucks, improved roadway and better route planning. Unit sorting costs increased 5.8% to RMB 0.30, driven by increased labor costs and higher depreciation and amortization charges.
We continue to raise our level of automation in response to increasing human resource costs. Gross profit increased 55.9% to RMB 2.4 billion, benefited from both volume and ASP increases on top of meaningful cost efficiency despite lower-than-expected volume. Gross profit margin rate increased 6.1 points to 27.3%. SG&A expenses as a percentage of revenue dropped 0.3 points to 4.9%, demonstrating continued scale leverage by our corporate cost structure.
Income from operations increased 59.9% to RMB 2.2 billion, and associated margin rate grew 5.9 points to 24.3%. Operating cash flow grew 58% to RMB 2.8 billion. Our capital expenditure totaled RMB 2.1 billion.
We are hopeful that COVID restrictions would gradually eat off and macroeconomic condition would improve in 2023. We believe that China's express delivery industry has great potential to grow for the longer term, and ZTO would remain a strategic focus on market share gain upon achievement of targeted profit level. All of these will be made possible through continued effort on standardization and digitization where data analytics and process improvements will lead to further upgrade of our leading operating efficiency and quality of earnings.
Taking into account the current market condition, the company revises its previously stated annual guidance. Parcel volume for 2022 is expected to be in the range of 24.3 billion to 24.7 billion, representing a 9% to 11% increase year-over-year. Meanwhile, the company remains confident in achieving no less than 1 percentage point increase in its market share for the entire year of 2022. These estimates represent our current view, which are subject to change.
Now this concludes our prepared remarks. Operator, please open the call for questions. Thank you.
[Operator Instructions] Our first question will come from Ronald Keung with Goldman Sachs.
[Foreign Language] I have 2 questions. One is want to hear about how the recent COVID new cases, how has that disrupted our business? And how are we ensuring the growth and also good service quality in the times of slight disruptions in outlets and some of our operations.
And second, I'd like to hear management's view on how the next year 2023 will play out because the -- on both possible in growth and also pricing and knowing that the price hike for the industry side in September last year, and the whole industry has gone through a very healthy uplift in profitability. And so as we lapse the price hike around 3 to 4 quarters now, how are we thinking about pricing into next year?
[Foreign Language]
[Interpreted] Thank you, Ronald, for your question. Let me translate for the Chairman. First of all, the impact of the pandemic and specifically those prevention and restriction measurements, certainly has a negative impact on our business. So we, on one hand, are focused on the prevention, and on the other hand, continued our growth focus.
We believe that after the major congress meetings, policies will gradual. Even though it is gradual, but we'll certainly come about to stimulate the economy and continue to raise consumers' confidence in supply chain, resuming its efficiency as well as logistic businesses, particularly Express businesses.
For next year, we are looking at a low comp, and we are hoping -- we are hopeful that the business will continue to focus on quality of growth, and the economic rebound will again provide greater opportunities for us. So for 2023, we're seeing the likelihood of previously experienced fierce competition is low as everyone's starting to focus more gradually on quality of operations. And as well as what we have seen, the government's conviction in regulating competitive environment, ensuring healthy competitive dynamics taking place.
And the industry growth has slowed down, yet the increase in volume in next year will be the target of everybody's focus in terms of growth because the installed base is there. So what we are doing, and again, is what we have been doing is laying the foundation of operational efficiency as well as quality of earnings, not only to ourselves but to our network partners in that extent that they are ready and they are prepared as well in seizing the opportunity that will arise.
Overall view is that in general, as the policy continue to ease and relax, the economic operations will begin to tend to normal. In that sense, then our focus will continue to highlight our strength, focusing on quality of services. And as we reach our profit target, we will further our primary goal of expanding market share.
What we have seen in the past, the divergence of the marketplace is clear. The stronger will become stronger, and the profitability will provide even further support for accelerated growth. It will eventually be -- the winner will eventually be those who are well prepared, who has the capability of being their best, and time will tell. Time will certainly support our longer-term view that the industry growth has its potential, and the winners will take what it deserves.
Our next question will come from Lu Xu with Citi.
[Foreign Language] So we noticed the RMB 0.01 lower on the unit transportation costs despite the higher fuel costs, but the unit sorting cost has increased year-on-year, and we like -- could the management share more on the unit cost reduction going forward? And where would the major cost reduction come from? And what would be the potential -- the cost reduction potential if we have any guidance? Or could you give us any color on that? And how should the capacity expansion plan should be in the future to -- more tailored to better optimize the utilization rate?
[Foreign Language]
[Interpreted] So let me help translate. The hike, the oil price hike in the third quarter, the impact on our total cost per parcel is about RMB 0.03. As we all know that the domestic oil price increased by about 30%, and the global price is somewhere around 25% to 30%. So we have still a RMB 0.01 improvement on the per parcel transportation costs. It means that we have received benefit from the efficiency of transportation operations with a larger capacity, trailer trucks, as well planning and improvement of the low rate.
Now on the sorting cost per parcel, it increased RMB 0.01 year-over-year. We have seen lower-than-expected volume as we have a proportionately higher fixed cost. Specifically, we have our own personnel in the sorting facility. So the scale leverage is diminished in that sense when volume is lower than expectation.
And another factor impacting the sortation cost per parcel is the increased depreciation and amortization from new hubs and new equipment installation into putting in operation. Going forward, in the near term, what we will and we have seen and we will continue to benefit from our digitization and operational excellence improvement.
Route planning, shift designing, total end-to-end coordination, all these will help us reduce per unit cost. In the longer term, as we have mentioned in the past, as we achieve our goal of expanding market share, more volume coming into our network, then we are able to realize even further cost productivity and efficiencies as our routes become more direct, as our number of sortation comes down. In other words, more and more of the parcel, greater portion of our parcel will only go through sorting 1 or even 0 sorting. And that will significantly reduce the per unit cost even further. So I hope this answers your question.
[Foreign Language]
[Foreign Language]
[Interpreted] As far as capital investment, we will continue to monitor macroeconomic conditions and we will continue to recalibrate our plan of investment. Although we do believe that the peak investment periods have been in the past, we've already gone past that because majority of our sorting hub and super sorting hubs have been established, and the ongoing CapEx expenditures, with a bigger portion of that would go towards some of those upgrades. Most of our infrastructure construction is already in place. So we do believe that the CapEx spending will be tapered off or held steady.
Next question will come from Frank Yip with Daiwa Capital Markets.
[Foreign Language] So let me translate. So my question is, I got 2 questions, first related to the pandemic outbreak. Is it that given the year-to-date [indiscernible] (40:31)Q3 parcel volume growth, is this mainly coming from the pandemic disruption? Or is it mainly related to the weak consumer expenditure? So if we are excluding for those pandemic disruption for the next year, so what kind of growth rate that we are targeting for?
And my second question is regarding to the divergence profitability amongst peers. So what is the key reason or the key factors that we have a better performance than the others?
[Foreign Language]
[Interpreted] To your first question, the majority of the slowdown comes from the pandemic associated either prevention or restrictions or disruption on the supply chain. The consumers' spending is impacted by the larger environment of the overall logistics, the overall sentiment and certainly, the pandemic impact has a more significant negative impact.
The likelihood for next year, we believe the industry, it has an opportunity to reach a double-digit growth. But the reason is that we think, first of all, it has a low base. And then two, as we are seeing the country is becoming more and more capable of addressing sporadic outbreaks and becomes more responsive in addressing localized outbreaks. So we do think that the government -- the central government will gradually ease off some of the restrictions so that the economy will return to normal gradually.
So for our profitability better than our peers, we think that there are some of the -- perhaps 3 reasons. One is, for sure, our quality of services. We've often talked about the price premium that ZTO enjoys. And we have consistently focus on quality of services, differentiated quality of services, not only at the transit part by ensuring our network partners at the pickup and delivery are also up to par. And that really helped us maintain a level of price premium in the marketplace. On the other hand, also bringing in more customers who focus more on quality versus price.
Second, our own initiatives, our own focus on end-to-end operational efficiencies also helped greatly ensuring our profitability, and certainly, we enjoyed better scale leverage than anyone else.
Third, which is more important in overarching because it is our primary focus on balancing all 3 priorities: volume increase, market share gain, profit expansion, quality of services. And then further, we are exercising efforts and discipline not only to balance all 3 for ourselves, we are helping our network partners because then they are able to invest alongside of us further their sustainable growth -- so we do believe going into a time of rebound and recovery, we're in a much greater position to maintain our lead and then further expand our market presence.
[Foreign Language] So my follow-up question is can you give some of the colors regarding our time [indiscernible]. So what exactly is the [ concept of ] contribution or development contribution right now?
[Foreign Language]
[Interpreted] Indeed, to diversify our product is one of our initiatives, and we have officially launched the standard express product, [Foreign Language], in 2021, which both differentiated services in terms of predelivery phone call and guaranteed timeliness and precision commitments in last-mile customer delivery. It has currently covered most of our major cities, perfect level cities in China, around over 300-plus cities, and their predelivery call notification is over 99%.
It has -- we have plugged into the mainstream ordering platform in the marketplace, and we are also ramping up the on-site delivery rate through strategic technology adjustment. Our daily volume for this particular product is over 400,000 packages to be and the customers are all enjoying this product. We have been successfully expanding this protocol or this -- yes, this protocol, and we are committed to expand the services further across the nation.
Our next question will come from Thomas Chong with Jefferies.
[Foreign Language] My first question is about the e-commerce landscape. Given that we have been seeing short-form video, it is ramping up very quickly, may I ask management about our parcel volume mix among different platforms?
And my second question is about our investment strategies. Given that we have been seeing our peers also investing in overseas and local on demand, I just want to get some color from the management with regard to our investment spend over the next couple of years, given that our profitability is very good.
Thank you for your question. I'll take these 2 questions. We have been -- ZTO is an open platform. We serve all types of e-commerce or forms of those. You're right that the video streaming, such as Douyin and Kuaishou, so and so on and so forth, they are all becoming more and more of the mainstream players, in addition to what we have previously seen the Tmall and Taobao. So as an open platform, we do serve all. In other words, the development of their growth, of their volume increases is consistent with our volume mix in serving these up and coming and new form of commerce.
And the second question, investment strategy overseas. Since in the early years, about 10 years ago, we have started looking into Southeast Asia regions investment. However, we have come away with the experience that, first of all, those markets are small, much smaller. If you put some of the country together, they are probably equal to only 1 of our provinces domestically. So our resource disbursement, our resource allocation is according to the size. And certainly, there are certain countries in the Southeast Asia, their opportunity is similar to perhaps China about 10, 15 years ago. Their e-commerce development is also enjoying great upside and room for growth. So, yet, we have to be very careful because we know network operations. We know the partner model. Yet you have probably observed, there are more quality demand, quality of services becomes available only when directly vertically operated model when that is more efficient.
So what we have done is, as we put our footprint overseas in Southeast Asia, in that sense, we also expanded resource secure procurement in Europe, in Africa, yet the expansion investment for overseas has to be careful. It has to be systemic.
What we have also observed recently, the price has been really -- the pricing capability has been really weak in the international arena. Part of it is, of course, the global pandemic impact. Another part of it is the whole industry is going through recalibration. [ Han Yao ] being one of the key players, who have shifted most of its volume to its own invested companies. And the pricing, in a way, is volatile. And so we are observing, we are watching. And on a greater sense, ZTO has always been prudent in its own investment strategy. So I can't tell you recently of certainty that we are going into international investment, but we are watching, we are observing and finding the right opportunity becomes important for us to allocate our rich resources.
Last question will come from [ Frank Yulais ] with [indiscernible].
This concludes our question-and-answer session. I would like to turn the conference back over to Huiping Yan for any closing remarks.
Once again, thank you, everybody, for participating on our call. The company is in a great shape. We are taking the opportunity to better ourselves while the external macro environment continued to improve, and we are hopeful the rebound will certainly arrive in due time.
Another thing I want to report to you or point out to you that the Board has recently approved an additional RMB 500 million buyback plan for us to ensure our return on interest, our return on our shareholders.
So I look forward to speaking with you all in the future. Thanks again for joining us today.
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.]