ZTO Express (Cayman) Inc. (ZTO) on Q4 2022 Results - Earnings Call Transcript
Operator: Thank you for standing by, and welcome to the ZTO Express Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Ms. Sophie Li, Director of Capital Markets. Thank you, Sophie. 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; Ms. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights. Then I will go through the financials and guidance. We 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 the current market and operating conditions. 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 Committee. 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, I translate for him in English. Meisong Lai: Hello, everyone. Thank you for participating in today's conference call. For the fourth quarter of 2022, ZTO delivered a total volume of 6.59 billion, which increased 3.9% year-over-year, extending our market share by 1.5 points. Our public satisfaction ranking continued to be among the top of the industry with steady improvement. Meanwhile, we achieved an adjusted net income of CNY2.12 billion, which increased to 21% over the fourth quarter of last year. In 2022, affected by the recurring pandemic, overall growth of express industry decelerated. Facing by challenges, ZTO focus internally and further solidified our industry-leading position with increased market share, improved service quality and profitability. In 2022, our parcel volume reached drove 24.39 billion, which expanded our market share by 1.5 points to 22.1%. At the same time, our adjusted net income grew 37.6% year-over-year to CNY6.81 billion. Our strong performances came from concerted efforts by everyone under the ZTO brand, including network partners and the carriers. Start with a clear set of strategic goals we implemented specific work priorities as following: Firstly, we strengthened and the standardized operational safety controls and removed or rectified potential safety hazards. During the pandemic period, we made best effort to ensure uninterrupted package flow of consumer necessities without compromising prevention efforts. Second, through the effective control quality and coordination of all 4 stages of pickup, quotation, transportation and delivery activity. We are able to improve our service quality and the public satisfaction, which in turn enhance the ZTO's brand recognition and the reputation. Third, we've raised the level of fairness and transparency of network policy, particularly with regards to KA customer operations by assessing the volume breakdown and the profitability in a couple of KA customers. We systematically eliminated and restored market competitiveness as well as earnings for partner . Fourth, with further integrated operations, finance and IT to improve data-driven process management previous reporting, which mainly presented results to headquarters was upgraded to analytics that provides insights to help identifying problems on a timely basis and solutions can quickly follow. In 2022, China's economy demonstrated resilience against multiple headwinds. ZTO also overcame various challenges and keep the both volume and size, which proves the effectiveness -- which proves the effectiveness of our strategy and added confidence for us to continue to focus on ourselves and improve operational excellence. Entering the first quarter of 2023, we saw signs of recovery in China's economy, where consumers' confidence have increased. The logistics industry has been regarded as a strategic and foundational of the national economy. As the pacesetter ZTO strives to lead us to the country's expectations to grow bigger and stronger. Under the priority of stability and sustainability, we will continue to execute our corporate strategy with the following initiatives: First, ensure a safety of pickup and delivery, sorting and transit data security throughout our business processes, continuously improve controls and measures to reduce accidents and avoid . Second, improve output of infrastructure investments, optimized capacity planning with a more scientific approach and coordinate investment planning to include our network partners' capabilities against the long-term need. Third, increase granularity and improve the accuracy of cost analysis in order to set price accordingly by line-haul routes. We use such digitized tools to improve effectiveness of labor resource planning with improved unit efficiencies, increased utilization of PP&E, including transit . Fourth, empower of our partner always in various aspects, such as setting parcel volume KPIs according to achievable market share growth to alleviate concerns of added weight year-after-year measured by growth rate. These rewards and recommend assessments with associated operational conduct so as to drive improvements. Analyze the shortcomings of [indiscernible] effective growth and provide support for targeted reforms. Provide as many practical tools as possible to better manage their day-to-day. Fifth, per month implementation of last-mile policies to fully incentivize the carriers in acquiring retail customers. With the high risk of pay level in the industry, our carriers will truly achieve entrepreneurship and better serve their customers. Sixth, accelerated last mile presence from [indiscernible] direct linkage and improve on-demand delivery capacity by post-operating. Explore opportunities of community service and not only reduce delivery cost but [indiscernible] last mile products and services. Seven, strengthen the core Express business and organized resources and competitive advantages of eco businesses. Rely on core competencies and refine diversified capabilities to perform coordinated and high-quality eco-capability metrics. We remain optimistic about the long-term growth prospects of China's Express delivery industry that the strong will become stronger is an apparent development trend and its desire to pursue profitability has become mainstream. Volume and market share have came through low price and bottom line losses are not sustainable. Only with robust network, efficient delivery capacity, high quality of service and excellent cost efficiencies in our business develop into a bigger and a stronger enterprise. Data-driven process management will help us continuously optimize precision in policy design. The effectiveness of process improvements and efficiencies in resource utilization. We have quickly improved our [indiscernible] measure what we have and target what we want to achieve in order to accomplish a balanced set of results in accordance with our overall corporate strategy. In 2023, we will accelerate the transformation from high quantity to higher quality by relying on our shared-success culture, best yet stable network, high operating capacity and strong cash flow we will unify our thinking, clearly lay out our goals, make full use of our resources, drive synergy, maintain safety achieved on both quantity and quality. Meanwhile, we will support our network partners and the carriers with fairness and protect their rights and interests help improve our network partners' capabilities and strengthen their confidence. We will keep growing our core business and expand the comprehensive logistics products and services to meet diverse consumer needs. As a corporate citizen, we will take on more social responsibilities and create greater social value. Next, let's welcome our CFO, Ms. Yan, to introduce the financial results and the status of ZTO. Huiping Yan: Thank you, Chairman. Thank you, Sophie, and hello to everyone on the call. As I go through our financials, please note that unless specifically mentioned, all numbers quoted are in RMB and percentage changes refer to year-over-year comparisons. Detailed analysis of our financial performances, unit economics and cash flow are posted on our website, and I'll go through some of the highlights here. We achieved volume targets by growing parcel volume 9.4% to 24.39 billion for the year, with firm implementation of our consistent strategies. Our leading market share expanded further by 1.5 points to 22.1%, while we maintained superior quality of services. The adjusted net income increased 37.6% to CNY6.8 billion for the year. Total revenue increased 7.1% to CNY9.9 billion for fourth quarter and 16.3% to CNY35.4 billion for the year. Annual ASP for the core Express delivery business increased 4.7% and 8.1% for Q4 and full year, respectively as industry pricing became more and more stabilized. Total cost of revenue was CNY7.1 billion and CNY26.3 billion, respectively, for Q4 and 2022 which increased 1.9% for Q4 and 10.6% for the year. Unit cost of revenue for the core Express delivery business decreased 0.7% for Q4 and increased 2.4% for the year. Unit transportation costs declined 2.5% for Q4 and 0.7% for the year, primarily due to increased use of self-owned high-capacity trailer trucks and improved low rate, absorbing the negative impact from increase in diesel fuel price. Unit sorting costs was flat for Q4 and increased by 5.8% for the year because of a higher level of automation and improved economics, economies of scale offsetting partially increased labor costs and higher depreciation and amortization cost for automated sorting equipment and facilities placed in service. Gross profit increased 23.2% for Q4 and 37.2% for the year as a result of increased volume and ASP. Gross profit margin increased 3.7 points to 28.1% for Q4 and 3.9 points to 25.6% for the year. SG&A, excluding SBC, increased 18.8% to CNY561 million for Q4 and increased 16.6% to CNY1.9 billion for the year. SG&A excluding SBC as a percentage of revenue remained low at 5.7% for Q4 and 5.4% for the year as our corporate cost structure remained lean and stable. Income from operations, excluding SBC, increased by 19.8% for Q4 and 37.6% for the year. Associated margin increased 2.6 points for Q4 and 3.5 points for the year. Operating cash flow was CNY3.8 billion for Q4 and CNY11.5 billion for the year, increasing 24.7% and 59%, respectively. CapEx totaled CNY7.2 billion for the year. Operating cash flow steadily increased and CapEx spending level stabilizes, we anticipate free cash flow to further increase for 2023. The company announced a USD 0.37 dividend for the year for shareholders on record as of April 6, 2023, representing a 30% dividend payout ratio compared to 25.9% last year. Now turning to our business outlook. Given considerations for the current market conditions, the company expects the parcel volume of 2023 to be in the range of 28.78 billion to 29.75 billion, equivalent to 18% to 22% year-over-year increase. Relative to the entire industry performance, the company is confident to achieve at least 1.5 percentage point increase in its market share for the entire year. These estimates represent management's current and preliminary view and are subject to change. Now this concludes our prepared remarks. Operator, please open the lines for questions. Thank you. Operator: [Operator Instructions]. Your first question comes from Tian Hou of TH Capital. Operator: Your next question comes from Qianlei Fan from Morgan Stanley. Operator: [Operator Instructions]. Your next question comes from Parash Jain from HSBC. Operator: Your next question comes from Ronald Keung from Goldman Sachs. Operator: No further questions at this time. I will now pass back to the management team for closing remarks. Huiping Yan: Yes. Thank you all very much for participating on today's call, and thank you for all very good quality questions. And I look forward to discussing and talking with you more as now we don't have much travel restrictions. So look forward to speak to you and perhaps seeing you in person. Thank you again. Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.ZTO Ratings Summary
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Morgan Stanley Reiterates Overweight Rating on ZTO Express, Sees Valuation Support
Morgan Stanley analysts maintained their Overweight rating and set a $27.70 price target on ZTO Express (NYSE:ZTO) stock. The analysts expressed confidence that ZTO's share price will likely rise in the next 60 days, noting that recent trading dips have made the stock more attractive in terms of valuation. The analysts highlighted the company’s solid cash dividend yield as valuation support and suggested that ZTO might accelerate its share buybacks ahead of interim results.
The analysts also pointed to an impending inflection point in the industry where struggling competitors could face network disruptions, potentially leading to a re-rating of leading companies like ZTO. The analyst estimated a 70% to 80% probability that this scenario will occur, suggesting a favorable outlook for ZTO.
Morgan Stanley Reiterates Overweight Rating on ZTO Express, Sees Valuation Support
Morgan Stanley analysts maintained their Overweight rating and set a $27.70 price target on ZTO Express (NYSE:ZTO) stock. The analysts expressed confidence that ZTO's share price will likely rise in the next 60 days, noting that recent trading dips have made the stock more attractive in terms of valuation. The analysts highlighted the company’s solid cash dividend yield as valuation support and suggested that ZTO might accelerate its share buybacks ahead of interim results.
The analysts also pointed to an impending inflection point in the industry where struggling competitors could face network disruptions, potentially leading to a re-rating of leading companies like ZTO. The analyst estimated a 70% to 80% probability that this scenario will occur, suggesting a favorable outlook for ZTO.
