May 18, 2017
Executives
Meisong Lai - Chairman Board of Directors, CEO James Jianmin Guo - CFO Sophie Li - IR
Analysts
Ronald Keung - Goldman Sachs Baoying Jai - Credit Suisse Ella Gee - China Renaissance Alex Yao - JPMorgan Edward Xu - Morgan Stanley
Operator
Good day, and welcome to the ZTO First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode.
[Operator Instructions] I would now like to turn the conference over to Ms. Sophie Li.
Please go ahead.
Sophie Li
Thank you, operator. Hello everyone and thank you for joining us today.
The Company's results and 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 Mr. James Guo, Chief Financial Officer.
Mr. Lai will give a brief overview of the Company's business operations and highlights followed by Mr.
Guo, 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'll 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 these 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 the 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 it for him in English.
Meisong, please go ahead.
Meisong Lai
[Foreign Language] Let me give the translation for chairman. Hello and thank you everyone for joining our call this morning.
I'm proud to announce that we start off the year on a very strong footing. Our market share and parcel volume continued to grow rapidly during the quarter.
Our parcel volume increased almost 41.9% year-over-year to 1.175 billion and generated [RMB2.6 billion] in revenues, which exceeded the high-end of our guidance, Our adjusted net income surged during the fourth quarter to RMB503 million. I believe these strong results demonstrate the effectiveness that our strategy is having on strengthening our industry-leading position and our ability to provide high quality service to our customers and the users.
To further underline this point, according to the data complied by China State Post Bureau, ZTO received the highest score for customer satisfaction among the Tongda operators, and the second highest overall in the first quarter. We are proving that [Indiscernible] between growing our market share with service quality and profitability, and while creating a strong and a stable network by aligning our interest with those of our network partners.
This ability to carefully balance interest across our entire network forms the backbone of our distinctive shared success model. To further support the stability of our network partners, we are creating new and innovative ways to support and drive their growth by improving their marketing and business development capabilities, strengthening big-data analytics, integrating real time data tracking across our networks, helping them diagnose and resolve operational issues with enhanced training and strengthening their day-to-day management of service outlets and careers to improve service quality.
All of these measures have effectively ensured the stability of our network, improved our reputation and customer satisfaction, and enabled us to provide more cost-effective service and products. We are leveraging the economies of scale being created by the rapid growth in our parcel volume to further cut costs and improve operational efficiency.
We extended our line-haul vehicle fleet and installed six additional sets of automated sorting equipment during the quarter in key geographic markets such as [Ningbo], [Indiscernible] [Wuxi], [Indiscernible], Tianjin and [Weifang]. By investing in automation and fleet expansion, we are improving our operational efficiency and reducing labor and transportation costs, which provide our customers with superior services and better value for their money.
These initiates have also increased trust in the strength and customer and the merchant’s [Indiscernible] to our brand. As the scale of our network expands, we will be able to handle larger parcel volumes with increasing efficiency.
By leveraging the scale of our network, high-quality services and the strong operational capability we are well positioned to achieve healthy and sustainable growth. I am confident that we will be able to carefully balance market share, service quality and profitability while growing our business to create more value for our business partners, customers and the shareholders.
With that, I'll now turn the call over to James, who will go over our financial results in more detail.
James Jianmin Guo
Thank you Chairman. I am pleased with our performance during the first quarter with revenue exceeding the high-end of our guidance.
Our economies of scale and cost cutting measures are beginning to bear more fruit with unit cost falling to RMB1.60 from RMB1.64 during the same period last year despite higher fuel cost increase. Revenue jumped 33.5% to RMB2.6 billion on the back of strong parcel volume growth, which increased by almost 41.9% to RMB1.175 billion.
I would like to go over a few housekeeping items before I go through the numbers in detail. We believe year-over-year comparisons are one of the most useful ways to assess our performance.
All percentage changes I'm going to give will be on that basis. To start with, parcel volume during the quarter increased by 41.9% to 1,175 million.
Our number of self-owned trucks increased to over 3,000 as of March 31, 2017, from 2,930 as of December 31, 2016. The use of more self-owned high capacity trucks has enabled us to enhance transportation efficiency continuously and reduce unit transportation costs as we further increase our economies of scale.
Revenues increased by 33.5% to RMB2.6 billion, primarily due to an increase in parcel volume as a result of overall market growth and our expanding market share. cost of revenues rose to RMB1.9 billion, an increase of 38.8% primarily due to increase in line-haul transportation, sorting hub operating, and accessories cost, which were partially offset by a decrease in waybill material cost due to the increased use of digital waybills by our end customers, which have lower costs than paper waybills.
Going into further details, line-haul transportation costs increased 43.3% to RMB1.1 billion. The increase was in line with the increase in parcel volume and was primarily due to increased cost associated with our self-owned fleet, which include fuel, tolls, drivers' compensation, depreciation and maintenance expenses.
This also includes RMB163.4 million in costs associated with outsourced transportation services. As a percentage of revenues, line-haul transportation costs accounted for 42.8%, an increase from 39.9% in the same period last year, mainly due to increases in fuel costs, depreciation and outsourced transportation costs.
Sorting hub operating costs rose 28.5% to RMB556.2 million primarily due to increases in labor costs as a result of wage and headcount increases, depreciation expenses and rental and related utility costs. As a percentage of revenues, sorting hub operating costs accounted for 21.3%, a decrease from 22.1% in the same period last year, as a result of greater economies of scale and improved sorting efficiency.
Cost of accessories increased 34.5% to RMB62.4 million, which was in line with growth in our revenue from the sale of accessories. Other costs increased 50.6% to RMB145.2 million, primarily due to an increase in the special costs associated with serving key enterprise customers, which were partially offset by a decrease in costs associated with the use of paper waybills.
Gross profit rose 21.5% to RMB730.6 million, while gross margin decreased to about 27.9% from 30.7% in the same period last year, mainly attributable to the downward adjustments to network transit fees we began charging our network partners in the second quarter of 2016 and the increase of line-haul transportation costs. Total operating expenses declined 49.7% to RMB73.9 million.
Taking a closer look, we see that SG&A expenses decreased slightly to RMB162 million, primarily due to the decreased share-based compensation expenses. Income from operations rose RMB656.7 million, an increase of 44.5% from the same quarter of last year.
In the first quarter, net income rose to RMB502.9 million, compared with RMB338.8 million we made during the same period last year. Basic and diluted earnings per ADS were RMB0.70 compared to RMB0.47 during the same period last year.
Adjusted net income surged to RMB503.1 million, compared to RMB367.9 million during the same period last year, which once again demonstrates just how effective our initiatives are to increase operational efficiency and reduce costs. EBITDA was RMB804.8 million, a significant increase from RMB520.2 million during the same period in 2016.
Adjusted EBITDA was RMB805 million, an increase from RMB549.3 million during the same period last year. Net cash provided by operating activities was RMB331.5 million compared with RMB263.6 million during the same period last year.
As of March 31, 2017 the company had RMB11.1 billion in cash and cash equivalents and time deposits, a slight decrease from RMB11.3 billion at the end of last year. Now turning to guidance, for the second quarter of 2017, we expect revenues to be in the range between RMB2.95 billion to RMB3.05 billion or $428.6 million to $443.1 million, representing a year-over-year growth rate of approximately 29% to 33.4%.
This represents management’s current and preliminary view, which is subject to change. This concludes our prepared remarks.
Before we open the call up for Q&A, I would like to remind everyone please limit themselves to two questions. Operator, we're now ready to begin the Q&A session.
Thank you.
Operator
Thank you. [Operator Instructions] And our first question will come from Baoying Jai of Credit Suisse.
Please go ahead with your question. And pardon me, ladies and gentlemen, we have Ronald Keung from Goldman Sachs.
Please go ahead.
Ronald Keung
Thank you for taking my question. Meisong Lai or James, [Foreign Language]?
We have been seeing quite a lot of expansion of businesses of express companies, where they have now expanded to less than truckload into warehousing, into supply chain, and so we would like to hear management’s view in each of these segments in express and trucking, and also strategies of the company in expanding in the current trucking and express segments and any further strategies of expanding into other logistic segments? Thank you.
Meisong Lai
[Foreign Language] I would do the translation for the chairman. To put it simple, express delivery business is mainly a BtoC business, whereas less than truckload business is mainly a BtoB business.
Currently our LTL business is an operating entity independent from our listed company. It is an important component of the [Indiscernible] ecosystem.
We founded the LTL business in the second half of 2016, and the establishment of this business now only follows the department trend of more advanced manufacturing industry in China, but also provides new service offerings to our customers. The LTL market in China has huge growth potential and is highly fragmented in the meantime.
So because of this, the LTL business has vast room for growth. Our LTL business adopts an operating model of distribution center ownership plus franchise network, focusing on establishing its competitive advantage through providing value-added services.
Asides from our core express delivery services, we are also looking into expanding our service value chain and ecosystem. Our current ecosystem includes the ZTO [Indiscernible] business, the ZTO international business, ZTO ecommerce, and the ZTO warehousing solution business.
While improving this business, we will also explore opportunities in adjacent business areas such as ZTO technology and ZTO finance in the future. And this adjacent business directly complements ZTO’s core business and greatly enhances our overall ecosystem.
For the year of 2017 and 2018, our focus will remain on operating the main express business, and building a bigger ecosystem. Next question.
Operator
Our next question will come from Baoying Jai of Credit Suisse. Please go ahead with your question.
Baoying Jai
[Foreign Language]
James Jianmin Guo
Sorry, you wanted to ask the question in English or do you want us to translate that for you?
Baoying Jai
Okay, okay sorry so I will translate by myself. So first of all congratulations to the solid volume growth in the first quarter especially as industry volume growth actually showing an upper view slows down.
So regarding the first quarter results, I think it’s very clear about one question, I want to follow up is a government subsidy, so would you like to elaborate more so what’s the subsidy about and is it recurring because I see RMB71 million yearly increase. So regarding the future in terms of the second quarter guidance, to be honest it’s a little bit weaker than my expectation, because I think last year the second quarter ASP is at a low base, so this year’s second quarter ASP should be relatively receding.
So is this because of volume growth is not that good, especially ZTO is fighting back aggressively since second quarter. Do we see some impacts from this?
And the second question regarding the [future] CapEx because in the first quarter we only see about RMB100 million in CapEx that the previous guidance regarding the three year is RMB4.5 billion. So do you maintain the same CapEx guidance or there would be some changes?
Thank you so much. [Foreign Language]
James Jianmin Guo
I will do the translation for the Chairman. First the [Indiscernible] in substance attached rebate and we believe that’s sustainable in the future as long as we have time for that every year.
And second, the expected revenue growth remains very strong and it may be less than expected because of the drop in the average weight in our parcel being shipped and also the increased adoption of the digital waybill. We also – we continue to believe that we continue to grow our parcel volume above the industry average.
Third, it’s about the competition in the market place. The initiatives our peers took right now did not affect us very much.
We are still an industry leader, in the Chairman’s words running Express delivery businesses like running the [Indiscernible] we focused our development growth in a more sustainable and long term manner by sticking to our strategic plan, we strategically deploy resources to ensure the stability of our network as well as improved service qualities and profitability of our networks. We would like to emphasize one more time that our network has always been the most, more stable among the peers and this is why we are able to succeed.
We believe that we’ll be able to maintain our advantage with stable, healthy growth in the future. In terms of cash in the first quarter, yes resuming the first quarter we added more than 70,000 owned trucks and we also [in store] success of automated sub equipments in the sorting hubs in six [Indiscernible] to improve the sorting efficiency.
As of the end of March, we already installed a total of 18 sets of automated sorting equipment and in 16 sorting centers. In the first quarter, we deployed approximately RMB509 million in CapEx and at this point in time I have no plans to raise the annual CapEx target.
The CapEx spend is in first queue is typically is over than the rest of the year. [Foreign Language]
James Jianmin Guo
Yes the Chairman also added that the drop in the average weight of deposit volume is a result of a change in the private mix and also the increased adoption of the digital waybill won’t have any impact on our profitability.
Sophie Li
Next question.
Operator
Our next question will come from Ella Gee of China Renaissance. Please go ahead.
Ella Gee
[Foreign Language] So I’ll do the translation myself. So first question we understand that some smaller Express Delivery companies have recently raised the price war.
We understand that they are much smaller than ZTO but we still wonder if this has any impact on ZTOs business even our regional business and how will ZTO, how does ZTO plan to hand over this type of price war. The second question is we understand that there is tier 1 increasing cost of pressure at franchisee level including rent and last-mile delivery guy’s salary.
We also saw that the whole industry rate, the last-mile delivery recently. We are wondering how will ZTO bear this higher cost together with the franchisees and how will this impact ZTO’s profitability in the long term?
Thank you very much.
James Jianmin Guo
[Foreign Language] Yes, it’s a long answer so let me answer your question one by one. The first answer to the first question about price war by other smaller companies.
The pricing war initiated by these smaller companies has very limited impact on us. We always told to the manager what’s going on in the industry.
We focused on increasing our market share and strengthening service quality and profitability to ensure a stable network. We believe when consumer too Express delivery services the price more consideration on the value for money rather than just the price.
Accordingly, we focus more on improving service quality and providing more cost efficient and comprehensive products and services to our customers. The scale and the stability of our networks are much better than these small companies and therefore our service is much more reliable.
The answer to the second question about the profitability of our service outlets. The Chairman says, we continuously monitor the profitability of our networks and outlets including their rental fees.
If the rental fees for an outlet is rising we’ll give them subsidies and for our entire work based on a basic delivery fee we will adjust the last-mile delivery fee rates based on market dynamics in different regions. At the same time we also care about the ability to compensate for the employees as well as the operational and the probability of our service outlets.
To cope with different problem we will provide different solutions to these service outlets. In the meantime we will continue to strengthen our training program, provide more support to the outlets and support the implementation of new technology to help increase the efficiency at our outlets.
In the long run, we believe that we are striking a good balance amount of market share, service quality and profitability. And the Chairman also adds this that we focus on maintaining that more stability and I think everyone’s interest and expand the capacity of our outlets to incentivize them and also secure the interest of our outlets and the network products.
And that’s the business philosophy that we have and the reason why we created a last-mile delivery mechanism that is clearly made for local conditions. We continue to improve and optimize this mechanism as the market evolves to better balance the interest of our network products, we will also provide subsidies for our secondary network transit fees, we make specific adjustments on the last-mile delivery fees based on the ratio of pickup versus delivery volume of the outlets and also we provide subsidies to deliver outlets locate in remote areas or offer extra rewards to the outlets if they are big deposit volume targets set for them.
We also subsidize our outlets at higher operating cost including those which are located in city centers. In order to develop a stable network, it is key to empower the outlets and help them improve their operational efficiency.
On the one hand we continue to increase our market share and enhance the influence of our brands which help our outlets expand their business volume. On the other hand, we also help our outlets improve their operational efficiency by provide them with training, develop that IT system for them as well and in addition we’ll continue to lower our operating cost which also benefit outlets.
By empowering our outlets we help them improve their profitability. And we believe improving the profitability of outlets as ZTO has improved its not due to some gain which means it’s not the case that one’s gain is offset by the other’s equal loss.
We’ve created positive synergies between our service outlets and the group and we can support and complement each other. And currently, the overall profitability of our outlets is very good.
And the answer to the third question about the recent last-mile fee increase, that China says that we raised the last-mile delivery fee by about RMB0.15 per parcel in our network. This can maintain the network stability improving the benefits to the delivery personnel, minimize and healthy competitions through price war and also promote sustainable development of the markets.
In the ZTO networks last-mile delivery fee are paid directly by the pick-up outlets to the delivery outlets and therefore it is borne by the pick-up outlets. In the near term, the fee adjustment may have an adverse impact on the pick-up outlets but in the longer term the policy is conducive to a healthier and more sustainable growth of the industry.
And the company has always focused on the stability and profitability of the network and our results demonstrates that our network is comprised of more stable and more efficient outlets in the industry and our relationship with network partners focuses more on share services and at the same time creating a win-win situation rather than just zero some relationships that benefits only one party but at the cost of the other parties. And that summarizes the answers to the questions.
Sophie Li
Next question.
Operator
Our next question will come from Alex Yao of JPMorgan. Please go ahead.
Alex Yao
[Foreign Language] So I have two questions, one is regarding competitive land [Indiscernible] base we notice what a – competitor only grew around their [Indiscernible] during the first quarter this year because our operational note disruption so results are low probably very cheap of their network partners. In such a competitive environments what role strategy do you accelerate market share gain.
The second question is about the ability and the profitability of the network partners, what’s your strategy to stabilize the network [partner instruction] would you consider perhaps some of the economic initiatives to these network partners to help them with the profitability. Thank you for coming here.
James Jianmin Guo
[Foreign Language] I’ll do the translation for the Chairman. To answer your first question, Alex, the Chairman says that we are glad to the see the increase of a market share during the first quarter and also the continuous improvement of our industry leading position.
We closely monitor what’s happening in the industry, but we focus our resources more on the trends and factors that could cause industry-wide changes and adjust our operating tactics based on the long term strategic goals. As an industry leader we have always believe that quality services and a stable networks are the basis for growing our market share.
We always focused on making our strategy work to enhance the capability of our entire network. Also I said, accordingly to the statistics release by the State Post Bureau, the total parcel volume in China for the first quarter was about RMB7.59 billion, an increase of about 31.5% year-over-year.
And our parcel volume was RMB1.175 billion for the first quarter, an increase of about 42% year-over-year. And our growth rate was much higher than the industry average.
As of the end of first quarter our market share was 15.5% in terms of parcel volume, an increase of 1.1 percentage points when compared to the 15.5% we had at the end of 2016. We believe that at large we’ll do the right thing.
We’ll maintain healthy and sustainable growth in the future. To answer your question, anything special that we did in the first quarter to gain market share or ensure the network stability, the Chairman said, we did nothing special in the first quarter to ensure our network stability.
Actually we have been constantly doing a same thing, doing the right thing in the past and we’ll continue to do so in the future. He says, we provide subsidies for some of our network partners, our service outlet.
For example, we provide subsidies for secondary network transit fees and also provide subsidies to delivery outlets located in remote areas or offer a share to this service outlet if they meet the parcel volume targets that we set for them. He said, we believe improving the profitability of our service [outlets as ZTO] as a group is not a [zero] some gain.
That means, this is not the case that once gain is offset by other equal to loss. We create positive synergies between our service outlets and we have support and complement each other.
And he says, currently the overall possibility of the service outlet in our network is very good.
Sophie Li
Okay. Our last question.
Operator
The next question will come from Edward Xu from Morgan Stanley. Please go ahead.
Edward Xu
[Foreign Language] So, my first question is about your GP margin. We see that in first quarter GP margins still decline, although the revenue increased dramatically and the net profit was pretty good.
So what’s your target for the GP margin for this year, specifically what does fuel cost account for your total cost in your cost structure, and also the increase of the last-mile delivery fee. Will that cost be borne by the headquarter?
Would you be giving some subsidy for the first-mile franchisees for this? First question.
Second question about the first-mile delivery stuff, because we see that lot of network company like [Indiscernible] is one. They are offering good compensation for this last-mile guys, which may approach some last-mile stuff from the regular Express companies.
How I am going to deal with this? And do you see any significant loss of your last-mile delivery stuff?
Thank you.
James Jianmin Guo
[Foreign Language] Yes. So, the first question is about the gross margin in Q1.
The Chairman says, first of all, I would like to point out that the gross margin in Q1 this year and last year are not directly comparable. The reason is that during the second quarter of last year we lowered a network charging fee, we charge our network partners.
And the change in the pricing has lead to reduction in the transit fee revenue per package. So because of this change the quarterly revenue generated during the second quarter of last year is not comparable with that in the previous periods.
And such pricing policy was change in April last year, so the apple-to-apple comparisons will begin there in the second quarter of this year. And according to the data that we currently have for April 2017 our gross margin stabilized when compare with the same period last year.
In the long term he believes that the gross margin will first stabilize and increase steadily. In terms of the transportation cost control, we adopted a number of measures during the first quarter of 2017 which are gradually taking hold.
These majors includes first, controlling the cost of third-party logistic vehicles. We increase the number self-owned vehicles and optimize the transportation routes to replace third-party trucking companies.
The increase in transportation cost during the fourth quarter of last year was because some of non-factors like higher fuel prices and some other seasonality, for example, that e-commerce sets promotion during the shopping festivals which require more third-party vehicles than expected. And also because of the intervals between supply and demands our transportation capacity in the marketplace during that period, the third-party outsourcing costs increase quickly.
While we have already bought more self-owned vehicles we have not been able to recruit or no need to recruit or we have not been able to recruit and trained enough qualify drivers in the a timing manner. So we have rely more on third-party trucking capacity in Q4 last year.
And this situation has significantly improved this year. And second we also control this company’s cost by adjusting their transportation route.
And third, we increase our vehicle capacity by effectively using our self-owned – self-operated distribution centers where we can arrange pickup and drop-up times ourselves. In the meantime we also improved the [performance of appraisal] system of our starting personnel.
We continue to increase investment in sorting equipments, especially automated extendable belt conveyor and automated sorting equipment and the increase in the belt conveyors helps improve efficiency which has effectively lower our sorting cost in Q1. And the investment in automated sorting equipments we will have much greater impact on us by the fourth quarter of 2017, by then we expect to have over 50 automated sorting equipment installed in a company.
And the next question about competition or the food delivery for personnel, to last-mile delivery personnel, the Chairman says, based on our understanding, delivery personnel especially Frontline food delivery personnels only accounted for very small portion of the total delivery personnel, perhaps less than 5%. So the case that [Indiscernible] that the food delivery business is attracted more delivery staff to join their range doesn’t exactly [rang shooters].
We don’t see this happening. There’s no major impact on our business.
In our service outlets are very stable because of our unique share success system and effective network partnerships with balance interest and our network partners are very loyal to us. Yes.
To reduce fuel cost, the Chairman ask that we will continue to lower fuel cost by centralizing the sourcing of fuels and that has stop to pay off in March last -- this quarter. And the last-mile fee adjustment, the Chairman mentions and raising the last-mile fee in the networks can maintain the stability of the network and improve the benefits to the delivery personnels and also promote sustainable development of the market.
And depending on the situation we may provide small subsidies to some of the search outlet by overall the pickup outlet we have to bear the last-mile delivery fee adjustment on their own. [Foreign Language] The Chairman also ask to the comments on the pricing adjustment in last Q2 and he said, what we actually did in last Q2 is actually we bundled smaller packages into bigger packages.
And as a result of this there are some minor impacts on the total pricing of the package. And he believes that, it is very important for us to track the right balance, amount our market share, search quality and profitability of the entire networks.
Only by doing this we can make sure that we can achieve long term sustainable growth in the entire network.
Sophie Li
Okay. Due to the time limit we have to end the meeting now.
In closing on behalf of the entire ZTO management team we’d like to thank you for your interest and participation in today’s call. If you require any further information or have any interest in visiting in China please let us know.
Thank you for joining us today. This concludes the call.
Thank you. [Foreign Language]
James Jianmin Guo
The chairman asked, because of short of time we have to end the call right now, but for investors who have more question about the business, about the company. Please feel free reach out to us.
We are open to answer your questions and we are company, we adopts a transparency culture. Thank you.
Bye-bye.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect your lines.