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ZTO Express (ZTO) Q3 2019 Earnings Call Transcript

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ZTO Express (NYSE: ZTO)
Q3 2019 Earnings Call
Nov 19, 2019, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the ZTO to announce Third Quarter Financial Results On December 18, 2019 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.

Sophie Li -- Investor Relations Director

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 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 sectors, 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 US 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. Lai Song?

Meisong Lai -- Chairman and Chief Executive Officer

[Foreign Speech] Please allow me to translate for Chairman first. Hello, everyone. Thank you for joining us on today's conference call to discuss the Company's third quarter results. During this quarter, ZTO maintained industry-leading service quality and customer satisfaction and delivered 3.06 billion packages, an increase of 45.9% year-over-year or 18.4 percentage points higher than the industry average. Our market share rose 2.3 percentage points year-over-year to 18.9%. Meanwhile, we delivered RMB1.32 billion of adjusted net income, a 24.6% growth from the third quarter last year. By focusing on our strategic goal, ZTO capped a strong growth momentum in the third quarter, as we achieved profit target, while ensuring high-quality of service and customer satisfaction.

First, our recalibrated network policies for 2019 has been taking good [Technical Issues], more and more local markets saw this year widen its volume need and attained regional advantages.

Second, with greater volume comes magnified economies of scale. We were able to leverage infrastructure resources we have accumulated over the years, as well as multi-generational enhancements in automation and transportation capabilities. Combined sorting hub and line-haul transportation costs per parcel declined 10.7% to RMB0.90.

Third, we increased efforts in educating our network partners to grasp the strategic importance of resource planning for last-mile operation. We're encouraged our network partners to proactively prepare for significant volume increase and established cost competitiveness.

The annual Singles' Day on November 11 has long being a industrywide exercise to test the extreme for pickup sortation, transport and delivery for express delivery company.

On November 11, ZTO's order exceeded 200 million and the parcel volume surpassed 100 million. On November 12, our total parcel volume exceeded 10 billion for the year of 2019. Tens and thousands of ZTOians [Phonetic] were extremely proud of this milestone accomplishment, and we bound to stay vigilant and true to our mission and uphold our sense of responsibilities and urgencies, as we continue to charge forward.

2019 is nearing an end, and in the coming days, we will remain focused on empowering our network partners to build up their comprehensive capabilities, including stronger last-mile presence. We will inspire and support our front-line personnel to become self-motivated and therefore, with entrepreneurial spirit. We will remain focused on increasing capability with better timeliness and the higher cost efficiency. With Data analytics and the benchmarking, we aim to establish a healthy competitive atmosphere among regions to faster sharing, learning and improving and to raise the bar for overall operational excellence.

We will remain focused on attention to details and making better assessment of the policy impact, hence achieving finer balance between sales and procurement regions. Take advantage of the existing regional advantages, stay alert for market changes and continue expanding our volume advantage across the nation. We believe this strong domestic consumption needs are supportive of a healthy growth prospects and that's the Chinese express delivery industry will continue to maintain steady growth momentum.

Through an arduous journey in the past 17 years, ZTO is past from behind, and if we were to outperform our peers and attain [Phonetic] superior advantage and involve ultimately toward equal [Phonetic] advantage. We have a long road ahead. We must be simple for the great area we are in, the [Indecipherable] to what we want to accomplish, pressure of our partners and carry out each task earnestly.

With that, I thank you for your attention. Next, let us hear from Ms. Yah, who will discuss the financials.

Huiping Yan -- Chief Financial Officer

Thank you, Chairman Lai and hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB and percentage changes refer to year-over-year comparisons. Detail analysis of our financial performance, unit economics and cash flow summaries are posted on our website. Here, I will only highlight some of the key points.

ZTO delivered a strong volume growth this quarter and exceeded our earnings expectations without compromising quality of services. Our volume grow nearly 1 billion parcels, the speed, that is 18.4 percentage points faster than the industry average. Consequently, our market share rose 2.3 points to 18.9% for the quarter.

Total revenues for our core express delivery business were approximately RMB5 billion, which grew 26.6% as a result of mixed effect of 45.9% volume increase and 13.2% price decrease due to incentives given as a necessary competitive measures during the quarter. Revenues for key accounts were approximately RMB619 million, an increase of 31.7% on a 50% volume growth. Key accounts represent less than 10% of our total volume.

Total cost of goods sold increased 26.1%. Volume correlated sorting and transportation costs grew 27.8% and 31.7%, respectively, as a result of scale leverage and very effective cost control. The net effect is that, gross margin rate decreased 1 percentage point from last year to 30.3%.

Income from operations grew 28.3% and SG&A, excluding SBC as a percentage of revenues decreased to 5.3% compared to 5.6% last year. We continue to demonstrate sound corporate cost advantage.

Higher amount for tax rebate and government subsidies this quarter helped the 0.8 point op margin rate increase.

Adjusted net income grew 24.6% to reach RMB1.32 billion and adjusted net income rate was 24.6% compared to 25% last year, relatively stable.

Last, turning to unit economics per parcel. ASP decline was RMB0.25, out of which RMB0.23 was associated with volume incentives. Competition remained relatively intense, partially in sales region -- particularly in sales region during the third quarter.

Cost of goods sold went down by RMB0.14 per parcel, of which RMB0.11 came from line-haul transportation and sorting hub cost savings. The increased use of self-owned vehicles with increasing proportion of higher capacity trailer trucks helped drive down unit transportation cost by RMB0.06. The increase in the number of automated sorting equipment helped to keep headcount low and sorting hub cost per parcel also went down and by RMB0.05. With better SG&A leverage adding back another RMB0.02, adjusted operating income per parcel declined by RMB0.06.

Operating cash flow was RMB1.42 billion and CapEx spending was RMB1.71 billion, which brings year-to-date total CapEx spending to RMB3.44 billion. Our annual CapEx commitment remains to be RMB6.8 billion as we expect cash outlay to be around RMB4 billion to RMB5 billion for the year.

In summary, we delivered a strong third quarter on both market share gain and earnings expansion. Our strategy is sound and our resource advantage and execution capabilities continue to support accelerated volume increase and operational stability for thousands of our network partners. We left our annual guidance unchanged at this time. Our track record has well demonstrated ability -- our ability to consistently achieve our set goals. Even the most recent market condition plus October performance to date, we are very confident that we are well on our way to deliver on our set target.

This concludes our prepared remarks. Operator, please open the line for questions. Thank you.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Melissa Chen with China Renaissance. Please go ahead.

Melissa Chen -- China Renaissance -- Analyst

[Foreign Speech]

Meisong Lai -- Chairman and Chief Executive Officer

[Foreign Speech]

Melissa Chen -- China Renaissance -- Analyst

I will translate myself. All right. [Speech Overlap] Sorry. So my first question is on the full-year guidance for this year. So, I'm just wondering, are we being a little bit conservative on the full-year guidance. If so, like what are our concerns for the 4Q?

And so, the second question is on the sorting cost per parcel. I saw like we already have 208 automated sorting equipments for this quarter, which have been already be in place. So I'm just wondering for the 4Q '19 and also for the 2020, are we going to saw -- are we going to see more like cost savings in terms of the sorting cost? Thank you.

Meisong Lai -- Chairman and Chief Executive Officer

[Foreign Speech] Okay. For the first question, the guidance, we have been demonstrating our ability to deliver on our set goals, and we are always prudent in communicating with our performance targets. And this goal we set for the year, it is not our habit to change them and then it's the fact that we are looking at our performance for the first three quarter, and also looking at the fourth quarter, we are confident and we are well on our way to achieve the goal.

On the second part of our question, we -- at the end of 2018, we have installed -- we installed 129 small parcel automation lines in our sorting hubs this quarter and compared to 78 equipment lines in the third quarter 2018. This is a large increase. We also installed 79 sets [Phonetic] of large sorting equipment in around 42 sorting hubs and we added also a couple of hundred dynamic weighing machines to better process and replace some of the manual works that was done before. Parcel sorted through our automation equipment accelerated to about 66% of total parcel, and automated sorting equipment line partially used -- it will be partially used to offset increase in the labor cost. As you understand labor is about 70% of our sorting hub costs, which indicates that we still have plenty of room to improve. And the fact that in the fourth quarter, so far what we've seen especially during the Double 11 period, our cost performance is much better than last year as well. So we are confident that there are still lots of room to grow in terms of obtaining cost effectiveness.

Melissa Chen -- China Renaissance -- Analyst

[Foreign Speech]

Operator

Our next question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Ronald Keung -- Goldman Sachs -- Analyst

[Foreign Speech] Thank you, Lai Song, and Sophie. I've got two questions. Firstly, just want to hear management's view on the 2020 outlook, that's given how the 2019 growth has been really strong for the industry, ASPs had fallen as a result, but also the unit cost have been quite successful and unit cost cuts and result the EBIT per parcel has fallen, but you still delivered a very strong profit growth. So into the 2020, how are we seeing our unit cost cuts? How much room do we have? And that -- how that really impact your sort of pricing strategy leading to the outlook for profits per parcel?

Second question is on just the franchisee, if you could share how your network partners have been doing based on surveys in the strong year volume growth? How have the profits came, if you could share any color on the health of our network partners? Thank you.

Meisong Lai -- Chairman and Chief Executive Officer

[Foreign Speech] Okay. For the first question, our outlook for 2020 is very positive. We believe the express delivery industry in China will continue to grow steadily and it's very likely another 10 billion parcel growth for 2020 and that is very possible. And this is based on the track record, and also an analysis of the domestic consumption needs, which is still very strong.

For our cost effectiveness gain, we still believe there are plenty of room, especially next year we are looking to install more large sorting equipment, also with digitization and also technology involvement. Some of our operational excellence will continue to evolve and with volume increase and the scale leverage, we have better opportunity to realize cost efficiency going forward.

On the second part, with the impact potentially on our partner -- network partners, two points we want to make that with, of course, first of all, the volume growth as a backdrop of our overall industry because of the volume advantage, ZTO is able to provide more volume to our network partners, which enhanced help -- which can help them in decreasing the cost on pickup and the delivery and roughly we estimated about RMB0.10 advantage in that area. And then secondly, our brand -- the brand brings about recognition of our stable services and quality of services. So on average, our price is RMB0.10 higher than our peers. This translates into confidence, as well as room for growth for our network partners. By our assessment, especially throughout this year in relative terms compared to our peers, our network partners are more stable and more confident. And as we adjust forward to -- as we look forward into 2020, we -- as we continue to focus on volume growth and market share gains, our network partners will again be our effective allies and also partners in achieving our overall goal.

Ronald Keung -- Goldman Sachs -- Analyst

Thank you, Lai Song.

Operator

[Operator Instructions] Our next question comes from Baoying Zhai from Citi. Please go ahead.

Baoying Zhai -- Citigroup -- Analyst

[Foreign Speech] Sorry, my first question is on pricing. We're actually seeing a little bit weaker than expected prices of third quarter and wondering how the prices would look like in the fourth quarter, especially during the peak season if the decline will be narrowed. Besides I also want Lai Song to give us an outlook about the competition strategy of next year. I believe the peers is waiting for our move first.

Second is on the last-mile delivery construction cost, we have been seeing it's very important for this year, and can we get more latest status of the post-stations number and percentage of the parcels is put in the [Indecipherable]f lockers of the post? And how do we think the future target of the percentage of the parcels in the lockers and post-station? Thank you.

Meisong Lai -- Chairman and Chief Executive Officer

[Foreign Speech] On the first question, as we look at the long-term trend of the price, it is stabilizing. If we look at the near-term, though, we do expect the price competition to be fierce. And for specifically fourth quarter, we -- it increased our price, especially during the peak season, we typically increase our price each year. And looking at the fourth quarter, we are experiencing lesser price incentives, if you will, for the fourth quarter.

On the second question and the last mile, Chairman indicated, there are two aspects for us to pay attention to. The first is the physical location or the post operations or last mile outlets. We have coordinated our effort with Cainiao and so far for the year there are about 5,000 new posts added under the Cainiao Post brand. In addition, ZTO's also expanded its own footprint on the last mile post operations, altogether there are nearly 30,000 post locations that we have established.

The second aspect is regarding people, we've mentioned before that it is important for us to -- even though they are not our employees, the last mile carriers have great touch points with our consumers -- with our customers. So help them managing the existing volume and the incremental volume is important to us. We strive to empower them to go from being an employee to exercise more of their proactiveness, as well as becoming more and more so entrepreneurs. As a result -- of course, our effort will continue to expand, as a result, the third quarter, we've seen C2C pickup volume has increased and that is a good sign. When you have people that are profitable, they -- that they find this way of doing business is supportive of their efforts, then the quality of services will increase, again establish a positive cycle, so that our last mile presence will be with greater mass and also greater quality. Thank you.

Baoying Zhai -- Citigroup -- Analyst

[Foreign Speech] So, may I follow-up on the parcel ratio, which will be put into the post stations or the lockers. How much percentage you think it will be achieved in the future? Because this is the most important cost reduction area in the future. Thank you.

Meisong Lai -- Chairman and Chief Executive Officer

[Foreign Speech] Okay. The current packages going through the last mile post is around 40% and going forward, because of the volume -- expected volume increase, we believe it's inevitable that the percentage will continue to increase. The -- in addition to that, it's not only a choice that we have to make, but also it is a very good strategy or an area for further reduction of the cost throughout the whole pickup delivery chain.

Chairman supplemented on the part of price. Our strategy has consistently in -- on a basis of quality of services, as well as volume -- as well as targeted profit goals, we will continue to expand market share. If you look at these three set factors or set goals for us, consistently in the past, we've been seeing increase on all three fronts with well-balanced approach. Going forward, we will still focusing on these three but according to the market condition, we would dial up and down in terms of which is more priority.

As you see in 2019, we've set our goal to grow faster to accelerate our growth to pull further away from our peers and going into 2020 is the same. We believe with our advantage in terms of our infrastructure and also our technology and execution capabilities to achieve greater market share gain to pull further away from the group to go from what, using Chairman's term, relative advantage to superior advantage to eventually evolve into a equal advantage. This is in our playbook and we are having our sights set on another fast growing 2020.

Baoying Zhai -- Citigroup -- Analyst

[Foreign Speech]

Operator

[Operator Instructions] Our next question comes from Xin Yang with China International. Please go ahead.

Xin Yang -- China International Capital Corporation Limited -- Analyst

[Foreign Speech] Okay. So I'll do translation myself. The first question is that, as Mr. Lai just mentioned that we have been -- we have built up absolute advantage in some area. I just wonder which area you're meaning to.

And the second question is about the guidance of market share. What is your new guidance for next year and also for the mid-term market share guidance? For example, for like 2023 or maybe longer term. Thank you.

Meisong Lai -- Chairman and Chief Executive Officer

[Foreign Speech]

Xin Yang -- China International Capital Corporation Limited -- Analyst

[Foreign Speech]

Meisong Lai -- Chairman and Chief Executive Officer

The first question, our strategy remains that we will maintain our quality of services and attain our profit goal and accelerate our market share gain. The -- during the quarter we mentioned that some of our regions, particularly those non-sales regions, including Midwest and also North West regions, their growth are faster than our ZTO's total average growth. So we've seen that regional advantage been established. Going forward for our market share goal, by 2022 to achieve 25% that is still on track and we are confident to achieve that goal.

Operator

Our next question comes from Nicky Ge with Trivest. Please go ahead.

Nicky Ge -- Trivest Advisors Limited -- Analyst

[Foreign Speech] I have two questions. First question is about our key accounts. Just wonder whether we have changed our strategy for the key accounts.

And second question is about the CapEx, it seems like we have lowered CapEx budget for the whole year. What's the reason behind that? Thank you.

Huiping Yan -- Chief Financial Officer

Thank you, Nicky for your questions. With regards to KA, we haven't changed our strategy and the strategy is still intact. The KA accounts, those require nationwide service and also a higher quality of standards. What we've done in the third quarter is we have been going through recalibration of the pricing strategy and also looking at various regions the performance, demands that is necessary for -- to serve our KA accounts. And again, the growth is healthy in terms of the total volume, it still stands around less than 10%. So nothing has changed.

On CapEx spending, there is one element, we are continuing to -- we continue to focus on building our infrastructure, including acquiring land use rights. Now this is something that's not within our own control, the supply and also the timing of when the government offer such resources for acquiring and that impacted our overall pace in cash spending. Now, the overall goal is still RMB6 billion to RMB8 billion CapEx commitment and so far we've spent RMB3.44 billion, and it's still within our RMB4 billion to RMB5 billion range of CapEx spending.

I hope that answers your question, Nicky.

Nicky Ge -- Trivest Advisors Limited -- Analyst

Yes. Thank you, Yan.

Huiping Yan -- Chief Financial Officer

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Huiping Yan for any closing remarks.

Huiping Yan -- Chief Financial Officer

Thank you, everybody, for joining us for the call. And once again, the Company has left its guidance unchanged and we are confident to deliver on the full-year goals that we've set. So far the business performance has been very promising and the fourth quarter, including the Double 11, we've achieved -- we've delivered great results and surpassed with great new records.

Separately on another thing, November 25 is our inaugural Investors Day, and we look to seeing you all and sharing with you what's happening here at ZTO and also outlook to what's to come for us going forward. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Sophie Li -- Investor Relations Director

Meisong Lai -- Chairman and Chief Executive Officer

Huiping Yan -- Chief Financial Officer

Melissa Chen -- China Renaissance -- Analyst

Ronald Keung -- Goldman Sachs -- Analyst

Baoying Zhai -- Citigroup -- Analyst

Xin Yang -- China International Capital Corporation Limited -- Analyst

Nicky Ge -- Trivest Advisors Limited -- Analyst

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