Nov 19, 2019
Company Representatives
Meisong Lai - Chairman, Chief Executive Officer Huiping Yan - Chief Financial Officer Sophie Li - Investor Relations Director
Operator
Good morning, and welcome to the ZTO to Announce Third Quarter Financial Results on December 18, 2019 Conference Call. All participants will be in listen-only mode.
[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
Thank you, operator. Hello everyone, and thank you for joining us today.
The company’s results and the Investor Relations presentation were released earlier today and are available on the company’s IR website at ir.zto.com. On the call today from ZTO are Mr.
Meisong Lai, Chairman and Chief Executive Officer; and Ms. Huiping Yan, Chief Financial Officer.
Mr. Lai will give a brief overview of the company’s business operations and highlights, followed by Ms.
Yan, who will go through the financials and guidance. They will both be available to answer your questions during the Q-&-A session that follows.
I remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance or achievements to differ materially from those in the forward-looking statements.
Further information regarding this and other risks, uncertainties and factors is included in the company’s 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.
Meisong Lai
[Interpreted] Please allow me to translate for Chair member. 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 goals, ZTO kept 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 growth and more and more local markets saw ZTO widen its volume leads and obtained regional advantages.
Second, with quicker, volumes comps magnified the 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 our transportation capabilities. Compliance, sorting hub and line-haul transportation costs per parcel declined 10.7% from $0.90.
Third, we increased efforts in educating our network partners to grasp the strategic importance of resource spending for last-mile operations. We encourage of our network partners to proactively prepare for significant volume liquidity and a speculation cost of competitiveness.
The Annual Singles Day on November 11 has long been an industry-wide exercise to test the extremes for pick-up, sortation, transport and deliveries for an express delivery company. On November 11, ZTO’s order exceeded RMB 200 million and the parcel volumes have passed 100 million.
On November 12 our total parcel volume exceeded 10 million for the year of 2019. Tens and thousands of ZTO-sans were extremely proud of this milestone accomplishment, and we've also stayed vigilant and true to our mission and uphold our sense of responsibilities and urgency as we continue to charge forward.
2019 is nearing an end and in the coming days we will remain focused on covering [ph] our network partners to build up their comprehensive capabilities, including stronger last-mile presence. We will inspire and support of our front-line personnel to become self-motivated and therefore with entrepreneurial spirit.
We will remain focused on increasing capability with other time limits and the higher-cost efficiency. With data analytics and benchmarking, we aim to establish a healthy competitive atmosphere among regions to foster sharing, learning and improving and to raise the bar for overall operational excellence.
We will remain focused on attention to details and making a better adjustment of the policy impact, hence achieving finer balance between sales and fulfillment regions. Take advantage of the exceeding regional advantages, stay alert for market changes and continue expanding our volume advantage across the nation.
We believe these strong domestic consumption needs are supportive of a healthy growth in the first half, and as the tiniest express delivery industry we’ll continue to maintain steady growth momentum. Through our arduous journey in the past 17 years, each years have passed from behind and if we were to outperform our peers and obtain superior advantage and evolve ultimately towards the eco-advantage.
We have a long road ahead. We must be thankful for the great era we are in, stay on course to what we want to accomplish, treasure our partners and carry out each task earnestly.
With that, I thank you for your attention. Next, lets here from Huiping who will discuss the financials.
Huiping Yan
Thank you, Meisong 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.
A detailed analysis of our financial performance, unit economics and cash flow summaries are posted on our website here and 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 grew 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.
Pay 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 scaled leverage and very effective cost control. The net effect is that gross margin rates decreased 1 percentage point from last year to 30.3%.
Income from operations grew to 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.
Prior amount for tax rebate and government subsidies this quarter helped the 0.8 point up 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.
Turning to unit economics per parcel. ASP decline was $0.25, out of which $0.23 was associated with volume incentives.
Competition remained relatively intense, partially in sales regions – particularly in sales regions during the third quarter. Cost of goods sold went down by $0.14 per parcel, of which $0.11 came from line-haul transportation in sorting hub cost savings.
The increased use of self-owned vehicles with increasing proportion of higher capacity trailer trucks helped to drive down unit transportation costs by $0.06. The increase in the number of automated sorting equipment helped to keep headcount low and sorting hub costs per parcel also went down, and by $0.05.
With better SG&A leverage, adding back another $0.02, adjusted operating income per parcel declined by $0.06. 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 our ability to consistently achieve our set goals. Given the most recent market conditions 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.
Operator
[Operator Instructions] Our first question comes from Melissa Chen with China Renaissance. Please go ahead.
Melissa Chen
[Foreign Language] 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 for the second question it’s on the sorting cost per parcel. I felt like we already have 208 automated sorting equipments for this quarter, which have been already been in place.
So I'm just wondering for the 4Q ‘19 and also for the 2020, are we going to see more like cost savings in terms of the sorting cost. Thank you.
A - Meisong Lai
[Interpreted] Okay, for the first question, the guidance, we have been demonstrating our ability to deliver on our goals and we are always prudent in communicating with our performance targets. And the goal we set for the year, it is not our habit to change them and then the fact that we're looking at our performance for the first three quarters and also looking at the fourth quarter, we are confident and we are well on our way to achieve the goals.
The second part of our question, we – at the end of 2018 we have installed – we installed 129 small parcel automation aligned in our sorting hub this quarter and compared to 78 equipment lines in the third quarter of 2018; this is a large increase. We also installed $0.79 of large sorting equipment in around 42 sorting hubs and we added also a couple of 100 dynamic weighing machines to better process and replace some of the manual work 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 increases in labor costs. As you understand, labor costs 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 W-11 period, our cost performance is much better than last year as well. We are confident that there are still lots of room to grow in terms of attaining cost effectiveness.
Operator
Our next question comes from Ronald Keung with Goldman Sachs. Please go ahead.
Ronald Keung
[Foreign Language] Thank you, Meisong and Sophie. I have two questions; firstly, I just want to hear managements view on the 2020 outlook, given how the 2019 growth has been really strong for the industry, ASPs have fallen as a result, but also the unit cost have been quite successful in unit cost cuts and as a result the EBITDA part of its fallen, but you still delivered a very strong profit growth.
So into the 2020, how are we seeing in our unit cost cuts, how much room do we have and how would that really impact your pricing strategy and leading to the outlook for profits of parcel. Second question is on just the franchisee.
If you could share how your network partners have been doing based on maybe some of your surveys and a strong year of volume growth, how have the profit's been? If you could share any color on the health of our network partners?
Thank you.
Meisong Lai
[Interpreted] Okay, for the first question, 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, 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 digitalization 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 network partners, two points we want to make, that with of course first of all the volume growth as the backdrop of our overall industry, but because of the volume advantage ZTO was able to provide more volume to our network partners which enhance helped, which hence helped them in decreasing the cost on the pickup and delivery end; 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 confidence, and as we adjust forward to - as we look forward into 2020.
As we continue to focus on volume growth and market share gains our network partners will again be our effective allies and also our partners in achieving our overall growth.
Ronald Keung
Thank you. Meisong.
Operator
[Operator Instructions] Our next question comes from Baoying Zhai from Citi. Please go ahead.
Baoying Zhai
[Foreign Language] Sorry, my first question is pricing. We are actually seeing a little bit weaker than expected, prices of third quarter, and wondering how the prices would look like in the first quarter, especially during the peak season, if the decline will be narrowed.
Besides, I also want Meisong to give us an outlook about the competition strategy of next year, at least the peers is waiting for our move first. Second, is on the last-mile delivery construction because we have been seeing it's very important for this year.
And we get more latest factors of the power stations number and as a percentage of the parcels, it’s put in the – is it the lockers or the post and how do we think the future target of the percentage of the parcels lockers and post station. Thank you.
Meisong Lai
[Interpreted] 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 continue to be fierce.
And for specifically fourth-quarter, we did increase our price, especially during the peak season, we typically increased 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, on the last-mile, Chairman indicated there are two aspects for us to pay attention to. The first is the physical locations or the post operations for last-mile outlets.
We have coordinated our effort with Cainiao and so far for the year there are about 5000 new posts added under the Cainiao post brand. In addition ZTO also expanded its own footprint on last-mile post operations.
Altogether there are nearly 30,000 post locations that we have established. The second aspect is regarding the people.
We've mentioned before that it is important for us to, even though they are not our employees, the last-mile couriers have great touch points with our consumers, with our customers. So help them managing the existing volume in the incremental volume is important to us.
We strive to empower them to go from being an employee to exercise more of their proactivness, 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 – seem to see pickup volume has increased and that is a good sign. When you have people that are profitable, they find this way of doing business is supportive of their efforts; then the quantity of services will increase.
Again it establishes a positive cycle, so that our last-mile presence will be with greater mass and also greater quality. Thank you.
Baoying Zhai
[Foreign Language] 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 it is basically the most important cost reduction area in the future?
Thank you.
Meisong Lai
[Interpreted] 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. 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 pick-up delivery chain.
Chairman supplemented on the part of price. Our strategy has consistently been 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 be focusing on these three, but according to the market conditions 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 it’s the same. We believe with our advantage, in terms of our infrastructure and also our technology and the execution capabilities, to achieve greater market share gain, to go further away from the group, to go from what, using Chairman's term, relative advantage to superior advantage to eventually evolve into a eco-advantage.
This is in our playbook and we are having our sights set on another fast-growing 2020.
Baoying Zhai
[Foreign Language]
Operator
[Operator Instructions] Our next question comes from Xinyang with China International. Please go ahead.
Xinyang
[Foreign Language] Okay, so I’ll do the translation myself. The first question is that, as Meisong Lai has mentioned that we have been – we help build out absolute advantage in some area, I just wonder which area you are leaning 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 ’20 or ’23 or maybe longer term.
Thank you.
Meisong Lai
[Interpreted] The first question, our strategy remains that we will maintain our quality of services and obtain our profit goal and accelerate our market share gain. During the quarter we mentioned that some of our regions, particularly those non-sales regions including mid-west and also north-west regions, their growth are faster than our ZTOs total average growth.
So we've seen that regional advantage being established. So 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
[Foreign Language] I have two questions: First question is about our key accounts. Just wonder whether we have tuned our strategy for the key accounts, and second question is about the CapEx.
It seems like we need to work our CapEx budget for the whole year. What's the reason behind that?
Thank you.
Huiping Yan
Thank you, Nikki for your questions. With regards to KA, we haven't changed our strategy.
The strategy is still intact, the KA account does 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 are also looking at various regions of the performance demands that is necessary for serve our KA accounts.
And again, the growth is healthy. In terms of our total volume, it still stands around less than 10%, so nothing has changed.
On CapEx spending, there is one element we are continued 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 is our overall pace in cash spending. Now overall goal is still RMB6 billion to RMB8 billion CapEx commitment, and so far we've spent RMB2.44 billion, and it's still within our RMB4 billion to RMB5 billion range of CapEx spending.
Does that answer your question Nikki?
Nicky Ge
Yes. Thank you Huiping Yan.
Huiping Yan
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
Thank you everybody for joining us for the call, and once again the company has left its guidance unchanged and we're confident to deliver on the full-year goals that we've said. So far the business performance has been very promising in the fourth quarter, including the W-11 we've achieved, we’ve delivered great results and we’ve surpassed – we break new records.
Separately on another thing, November 25 in our Inaugural Investors Day and we look forward to seeing you all and sharing with you what's happening here at ZTO and also a outlook to what's to come for us going forward. Thank you very much.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.