ZTO Express (Cayman) Inc. Price & Performance (ZTO)

And welcome to ZTO Express Fourth Quarter and Full Year twenty twenty four Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. I would now like to turn the conference over to Sophie Li, of Capital Markets. Please go ahead. Thank you, Rocco.

Hello, everyone, and thank you for joining us today. The company's results and InvestorRelationspresentationreleasedearliertodayandavailableonthecompany'sIRwebsite@ir.zto.com. On the call today from ZTO are Ms. Mei Song Lai, Chairman and Chief Executive Officer and Mrs. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights. Followed by Mr. Yan, who will go through the financials and guidance. They will both be available to answer your questions during the Q and A session that follows. I remind you that this call may contain forward looking statements made on under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and the current market and operating conditions, and relate to events that involve known or unknown risk uncertainties and other factors. All of which are difficult to predict and many of which are beyond the 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 statements as a result of new information, future events or otherwise, except as required under law.

It is now my pleasure to introduce Mr. Mason Lai. Mr. Lai will read through his prepared remarks in their entirety in Chinese before I translate for him in English. [indiscernible] Thank you, Chairman Wei. Now let me translate first. Hello, everyone. Thank you for joining today's conference call. In the fourth quarter of twenty twenty four, ZTO maintained its high service quality and with a total parcel volume of 9,670,000,000.00. Up 11% year over year. We achieved an adjusted net income of 2,730,000,000.00 which grew 23.4% year over year. Further solidifying our industry leading profitability. In 2024, express delivery industry maintained relatively high growth and the overall scale exceeded expectations.

Meanwhile, with frequent e commerce promotions and the consumer growing price sensitivity, the proportion of lower value parcels have continued to increase. Exerting downward pressure on logistic pricing. Facing challenges, ZTO stays committed to our high quality growth strategy. On one hand, we accelerated the development of differentiated products and services and deepened the cooperation with e commerce platforms. Optimizing product mix as well as profitability will enhance brand recognition and customer satisfaction. On another, we strengthened standardization and coordination across our operational segments of our transit platform. Further improved end to end timeliness, reduced loss and damage and end complaint rate. In addition, we ramped up effort to empower our network partners, enhancing their capabilities to alleviate pickup and delivery cost pressures and improve service quality. For 2024, ZTO's annual parcel volume reached 34,000,000,000, growing 12.6% year over year. Notably, number of retail parcels in the fourth quarter grew nearly 50%. Significantly outpacing overall e commerce parcel growth. Reverse parcels for the full year more than doubled compared to last year. The optimization of our product mix brought by an $08 positive enhancement to ASP for the core express delivery business. Alleviating the impact from lower average weight per parcel and the price competition.

Together with continued operational cost efficiency gain and a stable SG and A structure, ZTO achieved an adjusted annual net income of 10,150,000,000.00 increasing by 12.7% year over year. Entering 2025, the express delivery industry has maintained strong growth momentum. However, the trend of consumption downgrade has yet to reverse. And the price competition remains intense. In such a market environment, our core focus is to align closely with market dynamics enhance service quality, achieved a higher than industry average volume growth, Further, we must motivate and enable our network partners with fair cost of bearing and profit sharing mechanisms to effectively strengthen pickup and delivery infrastructure and cost competitiveness so as to improve market penetration for retail parcels alongside of e commerce volume growth. And ultimately improve earnings of outlets and couriers enhancing partner network stability. Key initiatives include the following: first, sync our teas into end to end service quality by refining operational procedures and implementing data benchmarking. Aligning performance with internal metrics and external indicators to optimize transit efficiency and resource utilization. Improved first hours delivery ratio will boost overall timeliness and reinforce brand awareness. Second, effectively achieve mission critical volume targets by granting full autonomy to regional management teams to stay lock steps with market changes with efficient resources.

Ensuring fair and transparent network policies for all and adopting tiered approaches to tapping to new customers' potentials. Joint efforts by pickup and delivery partners to effectively target incremental market can capture volume driven growth opportunities. Third, further product and services enhancement by strengthening strategic partnership with e commerce platform. Leveraging ZTO's integrated ecosystem resources to build comprehensive supply chain capabilities. Refining differentiated products to enhance brand recognition and cultivate customer loyalty Fourth, improved last mile network expansion and penetration by clearly defining responsibilities of sectional coordinators to effectively execute initiatives such as profit sharing sufficiently to incentivize couriers to service retail parcels. Establish direct linkage between Owlette And Lost Milepost integrate commercial opportunities into local living These initiatives will help to reduce last mile costs. Increase retail volume, improve profitability for outlets and couriers, and expand consumer reach through multiple channels. Last but not least, improve end to end timeliness and operating efficiency by increment by implementing technology and data driven tools to optimize route planning low rate and in time capacity investments or upgrades. Over the past three decades, China's express delivery industry represented largely by private enterprises has evolved through scale expansion and concentration as well as profitability divergence.

ZTOs rise from the latest comer, follower a consistent leader is not a coincidence. Regardless of how the industry landscape has shifted, ZTO's core competitiveness stems from our shared success philosophy so that our partners can also win. Our entrepreneurial spirit of dedication, perseverance perseverance and focus as well as our proven ability to quickly adapt and grow through challenges and adversities Today, we stand at a critical junction of macroeconomic and industry development. We firmly believe that China's express delivery industry and its broader logistic market hold Inmerge's growth prospects. By staying committed to our focus on the industry and being our best, striving for operational excellence and expanding our scale, leadership with healthy quality of earnings in sync with market dynamics. And stand behind our network partners. Together, we are confident and well equipped to achieve our mission, which is to bring happiness to more people through our services. Next, let's welcome our CFO, Ms. Yan, to present the financials results and the future plans. Thank you, Chairman Lai, and thank you, Sophie. Hello to everyone on the call. As I go through our financials, please note that I'd like specifically mentioned, all numbers quoted are in RMB, and percentage changes refer to year over year comparisons.

Detailed financial information performances, unit economics, and cash flow are posted on our website, and I'll go through some of the highlights here. We adhered to the principle of profitable growth and continued to improve the quality of services and customer satisfaction. We attained 11% parcel growth to reach CNY 9,700,000,000.0 for the fourth quarter and 12.6% or CNY 34,000,000,000 for the year. Adjusted net income grew 23.4% to 700,000,000.0 and twelve point seven percent to CNY 10,200,000,000.0 for the quarter and the year, respectively. Total revenue increased 21.7% to RMB 12,900,000,000.0 for Q4 fifteen point three percent to 44,000,000,000 for the year. ASP for the core express delivery business increased 10.3% or $0.13 for Q4 and two point seven percent or $04 for the year. As the impact of decline in average weight per parcel and increase in incremental volume incentives were offset by the positive impact of the volume increase in retail parcels The total cost of revenue was KRW 9,200,000,000.0, and RMB 30,600,000,000.0 for Q4 and the year, respectively. Which increased 22.3% for Q4 and 14.2% for the year. Overall unit costs for the core express delivery business increased 11.1% to $0.93 or for Q4 and one point nine percent to $0.87 for the year.

Combined unit cost of sorting and transportation decreased 6.5% or $06 for Q4 And for the year, it was 6% or $04 benefiting largely from economy ease of scale specifically unit cost of line haul transportation decreased 11.1% to CNY $0.04 0 for Q4 and decreased 8.7% to CNY $0.04 1 for the year. Driven by more effective route planning in conjunction with improvements in fleet operations. Unit sorting cost was flat for Q4 and 2024 at $0.26 and $0.27 respectively. While improvements in automation and labor efficiency contributed to cost savings. Additional costs were incurred for sorting activities conducted on behalf of franchise partners. [indiscernible] increased $0.15 for the Q4 and $07 for the year in line with Ka revenue increase driven by significant volume increases in retail, and more specifically reverse parcels. Gross profit increased 20.2% to $3,800,000,000 for Q4 and increased 17.6% to CNY 13,700,000,000.0 for 2024. [indiscernible] profit margin rate decreased 0.4 points to 29.1% and increased 0.6 points to 31% for the year for the quarter and the year, respectively. SG and A excluding SBC decreased 7.3% to RMB $649,000,000 for Q4 and increased 9.3% to CNY 2,400,000,000.0 for the year. SG and A expenses excluding SBC, as a percentage of revenue, declined to 5% for Q4 and 5.4% for the year, reflecting strong corporate cost efficiency.

Income from operations increased 25.3% to 3,500,000,000.0 for Q4 and increased 17.7% to PHP 11,800,000,000.0 for the year Associated margin grew 0.8 points to 26.70.6% points to 26.6% for the year. Operating cash flow was 2,800,000,000.0 for the quarter, and TWD 11,400,000,000.0 for the year. Representing decreases of 28.514.5% respectively. This decline was primarily due to one, a onetime refund of franchise deposits totaling 1,200,000,000.0 under our new business policy to ease liquidity pressure of franchisees who in the past must make certain deposit with waybill purchases and then receive refund upon proper delivery of the package.

Two, higher advances for reverse logistics operations based on the terms customary with platform operators. Three, tightening VAT rate refund policies and four, a bigger portion of cash management products accounted under long term financial investments were associated interest income is recognized over a term longer than a year. Maturity. Our adjusted EBITDA for Q4 and 2024 was 4,600,000,000.0 and CNY $1,416,400,000,000.0, respectively. Capital expenditure for Q4 totaled CNY 1,200,000,000.0 and annual CapEx came in at RMB 5,900,000,000.0 indicating that we have achieved another year of free cash flow. Now moving on to business outlook. Based on current market and operating conditions. We estimated that the industry growth would likely be around 15% for 2025, we anticipate the company's parcel volume for the year to be in the range of 4,000,000,000 to TWD 42,200,000,000.0. Representing a 20% to 24% increase year over year. Now these estimates represent management's current and preliminary view which are subject to change. This concludes our prepared remarks. Operator, please open the line for questions. Thank you.

Thank you.

We will now begin the question and answer session. Today's first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Thank you, management. For the opportunity to ask a question. So number one is I want to ask about our priority on volume growth this year above industry so how has our market share progressed so far this year? The first quarter? And what has been the impact on pricing Just how other players are reacting? And what would be the impact to just our balance of profits this year with this strategic shift? And I want to hear about our CapEx, whether think the CapEx cycle has peaked and the CapEx plan for 2025? Thank you.

So first, let me translate for the Chairman for the first two part of your question, and then I'll answer the third part.

For this year, we anticipated growth of the industry to be around 15% and we set our goal to be growing at 20% to 24%. Which certainly indicate that we have a plan to grow above industry average. In turn protecting and also enlarging our market share. It is of course, without saying that we continue to focus on our strategy overall strategy, which is to improve quality of services, maintain and expand our market leadership, as well as achieve reasonable profit.

And this year, our our focus will be gravitated towards the quality of services and also the market share and volume increases. And I very clear indicated through our numbers Then the second part of the question relating to the first two months into the year where we have observed the growth momentum is still very much demonstrated because there are observed a lot of normalized e commerce promotions There are a lot of [indiscernible] increases in the smaller, lighter weight packages And then the new business model such as live streaming and e commerce and also reverse logistics continues to drive additional volume. And then also not the least, the government has rolled out a lot of favorable policies to stimulate consumption including trade ins and subsidies which also boosted consumer willingness to spend. It will support a recovery in consumption.

The cost effectiveness of express delivery industry has in the past and will continue in the future to sustain steady increase in the parcel volume consumption is still with potential for growth.

Now looking ahead, some of the cross border logistics and rural industry logistics will also fuel our industry demand as we talked about ZTO preparing and improving our capability in the supply chain, logistics services. So we think that the overall potential for the growth is very much intact. And for us to gradually roll out our new focus or new gravitation in the market share as well as our alongside our quality of customer services, And we'll help us achieve the goal that we set for us. Now this year, we have achieved in 2024, we our CapEx came in at billion. As we have pretty much established the entire network with close to 95 or about 95 super sorting centers most of the CapEx spending for this year, 2025, will be on the remaining few tracks of land that we would want to [indiscernible] To replace current rental [indiscernible] And then plus also there are some upgrades of the existing facilities that will be in the plan. So we estimate our total twenty twenty five CapEx will come in somewhere around RMB5 billion to RMB5.5 billion. And again, with strong cash flow from operations, we intend to repeat another free cash flow year.

I hope that answers your question, Ronald.

Yes. Thank you.

Thank you. And our next question comes from Quinn Lei Pham with Morgan Stanley. Please go ahead.

Thank you, operator. Thank you management for taking my question. And congratulations on very solid earnings growth.

I have two questions. The first question is about technology. So in this year, I think last year we have started to see some speed up in AI and other technologies globally? And that has driven some technology are potentially could be applied into the logistics sector, for example, autonomous driving, drone, humanoid. So and recall that maybe we have during the past decade have been achieving cost efficiency in improvements through automation and and self owned trucks. And the economy of scale has been marginally decreased? So with the new development in technology and AI, is there any new potential in terms of cost saving or in terms of revenue expansion in the next decade? And the same question is also related to that. So Ms. Yan has mentioned CapEx has been largely done regarding the sorting center like system in in China. But over the medium term, if we assume that the technology continue to evolve very fast, the cost of applying technology [indiscernible] Rapidly, will that impact our expectation on CapEx over the medium term? Thank you.

Which relates to the Sure. Yes. I'll again answer translate for the first part and then more specifically address your second part of the question as it relates to the cost. There has been a wide wide application of AI technology in the industry. And of course, ZTO is without exception. For example, machine vision, we integrated with the visual recognition technology and also the algorithm in sorting sorting equipment and the process enabling the system to automatically adjust operating procedures and also reduce sorting errors and improve efficiency.

In the order processing field AI also enabled automatic generation of four segment tracking codes. The four segment tracking codes will allow [indiscernible] smallest unit of destination determination so that the package could go directly to the courier. In terms of customer service, for example, we also have AI powered tools to enable quicker response speed as well as reduce dependency on human intervention. So there are plenty of opportunities that are currently already in place for us to utilize this technology. And certainly, as it continues to develop we will stay at the forefront to cooperate and work with the leading research companies in applying their technology in our operational environment. Chairman, Lai referred to some of the application as well. Not only to our operating platform, but also to our network partners on the last mile front end to end. For example, he indicated that he has recently visited many of our franchise outlets and he has observed the improved level of automation which allowed not only standardization of the operation of express delivery, but also improved efficiency, reduced cost. Some of the specific examples that we are able to work with our network partners in empowering them in adopting advanced technology includes autonomous driving vehicles.

Chairman indicated that this application already went into the commercialization we maintained an open attitude towards new technology and work in collaboration with these research firm with and rolled out solutions specifically for our initiatives, which is the direct link. So for one autonomous vehicles, it has great advantage over manned vehicle. Examples here is, on average, on a monthly average, one manned vehicle would cost about 2,000 to 3,000 But and the daily operating capacity is about 1,500 to 2,000 packages. The traditional manned vehicles are typically fossil fuel powered vehicle and it costs about $0.15 per [indiscernible] But using the autonomous vehicle that we are currently in design and ready to roll out in 2025, [indiscernible] [indiscernible] 7 to $8 per package. We are looking to purchase in bulk with these factories and research firm which will further reduce the cost on a per unit basis to somewhere around $5 to $06 or even lower to $05 So one of our focus is not necessarily spending our own money, but using our brand using our influence to work with the research firm as well as the manufacturer in empowering our network partners to secure OEM equipment and offer better competitive price for our network partners.

And secondly, the example that Chairman referred to is when we when our network partners, the outlet use more and more of the autonomous vehicles where the government continuously roll out or remove limitation on the use of autonomous vehicles on the road we believe there will be greater opportunity for us to help reduce per unit cost and improve efficiency. Now to the third part of the question, as I alluded to earlier, we are of the philosophy that at the right time, spending the right amount of money, technology is continuously evolving, and we are watching closely in how it could best integrate into our operations as well as helping our network partners in improving their efficiencies. So at the forefront, we will utilize our brand influence as well as our technological sensitivity as well as awareness as you know that we have over 1,100 IT personnel in including some of the algorithm engineers, they will help us in participating and benefiting from this technological technological development trend. Cost wise is very much paced with our volume increase as well as our efficiency gain plan. To just bring about additional color as we truly achieve the tri layer throughput as our volume continue to increase then the costs will be deployed As we mentioned earlier, scientifically,