ZTO Express (Cayman) Inc. (ZTO) Earnings Call Transcript & Summary

Good day, and welcome to the ZTO to announce Second Quarter and Half Year 2026 financial results. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Ms. Sophie Li, Company Secretary. Please go ahead.

Thank you, Chuck. 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 Mrs. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights, followed by Mrs. 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. [Foreign Language]

[Foreign Language]

[Interpreted] Thank you, Chairman, Lai. Now let me do the translation first. Hello, everyone. Thank you for joining today's conference call. In the second quarter of 2026, the express delivery industry grew 4.2% in volume year-over-year as anti-involution policies continue to gain traction, competition became increasingly rational and the overall industry pricing and profitability experienced a steady recovery. The industry is fundamentally shifting from its previous singular focus on scale and the price wars towards greater emphasis on value creation, network stability and tangible benefits for frontline partners. ZTO made solid progress across key operating metrics in the second quarter. Parcel volume reached 10.49 billion, up 6.5% year-over-year with market share expanding by 0.4 percentage points, entrenching our industry leadership position. Adjusted net income was RMB 3.09 billion, up 50.3% year-over-year, reaffirming the resilience of our profitability. Retail parcel volume grew 47% year-over-year. As our higher value and diversifying value-added service continue to scale up increasing value revenue diversity for our network outlets, while facing temporary cost pressures caused by oil price fluctuations during the quarter. Our end-to-end digitization-led intelligent transformation, combined with refined operational execution, enabled us to lower the combined unit cost of transportation and sorting by RMB 0.02 over last year, preserving cost competitiveness that was forged over the years. ZTO's second quarter performance is the outcome of synergies across 5 core aspects, which are productive policy guidance, unwavering long-term strategic focus, solidarity and the concerted efforts by network-wide partners, continuous increases in operational efficiency and improving product structure. It also owes much to the hard bone contributions by thousands of our operation operators and frontline delivery workers network-wide. First, regulatory direction remains clear and anti-involution policies were being consistently implemented. ZTO stands firm to safeguard a healthy competitive order, balances the interest of headquarters, franchisees and frontline practitioners and commit to fostering a sustainable eco network with equitable shares of benefits for all stakeholders. Second, the company maintains a long-term mindset that discourages permanent short-term scale gain and continuously consolidate foundational strength for its mid- and long-term development. We regard steady profit increases for network outlets, sustained earnings growth for frontline careers and healthy corporate development as our core operating objectives. And we continue to deepen our initiatives surrounding 3 key priorities: market share expansion, service quality upgrading and end-to-end cost reduction. Third, the entire network we unified with strategic alignment and increasingly advocate fairness and transparency in network policy making and implementation. We have an objective view on regional economic disparities and have further streamlined grassroot feedback. By tailoring incentive schemes and support resources to match outlet's actual operating conditions, we have further optimized the profit distribution mechanisms at the ground level through performance-based remuneration, hence steadily elevated the overall profitability and operational stability of the entire network. Fourth, we are extending our know-how for efficiency gains to outlets. We have built a standardized and ongoing operational data analytical system to enable performance visibility and traceability. We continue to enhance last mile ops efficiency through direct linkages, reducing organizational layers and expand profit margins. Fifth, we continue to enhance our tiered high-value business portfolio by penetrating deeper into retail parcels and reverse logistics, which optimize the mix between standard e-commerce parcels and value-added services. This also hedges against the potential single source fluctuations and strengthens the resilience of network profitability. China's express delivery industry is progressing from high-quantity competition to high-quality and sustainable development, focusing on the strategic principle of achieving high-quality service, high-quality market share and low end-to-end cost. ZTO will further our tasks in the following 5 key areas. First, continue to safeguard the environment of fair competition. We will adhere to regulatory guidance and take on a leadership role in maintaining industry's overall competitive order. Second, improve integrated competitiveness in service, market share and cost. On service, we will focus on door-to-door capabilities to build a clearly differentiated brand awareness. On market share, we will refine customer segmentation, increasing the proportion of small- to medium-sized customers and value-added services. On cost, we will establish benchmarks for comparable outlets and pass through the what and how of efficiency gains to the end [ market ]. Third, improve consistency of managerial capabilities across the network. We will standardize policies and customize improvement plans for loss-making outlets. By pushing down digitalization efforts, we will empower franchisee partners to reduce costs and grow revenue. We will encourage top-performing outlets to scale up and support struggling outlets in overcoming adversity to foster an eco network of mutual benefit and shared prosperity. Fourth, deepen digitization design and implementation. We will roll out hands-on training across the network, guide outlets in effectively utilizing tools to narrow gaps in volume, cost and service. We will also proactively align demand and capacity through careful planning. Fifth, ensure comprehensive safety management and protect the grassroot rights. Regular safety inspections will be conducted to identify and eliminate hazards, enforce accountability at all levels and establish strict compliance boundaries such as safety, labor practice and taxation. We will continue to refine career incentive and compensation schemes, safeguarding their legitimate rights and interests. Over the past 2 decades, we have overcome adversity and weathered intense competition. We have always been clear-minded that scale is merely an outcome and quality is what truly matters. We are committed to our development principle that integrates service quality, market share and reasonable profitability. We practice our philosophy of shared success and we firmly believe that the headquarters, outlets and couriers are interdependent part of a unity. Only when all parties collectively improve operational efficiency and increase shares of benefits, the entire network can then achieve lasting stability and long-term success. Guided by our mission of bringing happiness to more people through our services, supported by a solid infrastructure foundation and sound financial strength, we will continue to harness digitization efficiency, maintain and strengthen cohesiveness and the stability of our partner network. We are confident and capable of achieving steady, sustainable growth across the entire network, navigating through industry or economic cycles and creating lasting value for industry participants and our investors. Now let's invite Ms. Yan to present the financial results and guidance.

Thank you, Chairman, Lai, and Sophie. 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 information on our financial performance, unit economics and cash flow are posted on our website, and I'll go through some of the highlights here. In the second quarter, our long-term profitable growth strategy delivered solid results. Anti-involution regulatory efforts and our resilient franchise network continued to drive steady market share expansion with industry-leading efficiency. Our parcel volume grew 6.5% to 10.49 billion with a 0.4 points increase in the market share. Total revenue increased 23% to RMB 14.5 billion, while operating income rose 30.4% to RMB 3.23 billion. Adjusted net income grew 50.3% to RMB 3.1 billion, benefiting from a RMB 344.3 million tax refund as our wholly owned subsidiary qualified for a 10% preferential tax rate for tax year 2025. ASP for our core express delivery rose RMB 0.19 or increased 15.5%, driven by a RMB 0.17 positive impact derived mainly from increased KA volume mix, which included higher value reverse logistics and a RMB 0.02 increase from higher average weight per parcel. Total cost of revenue was RMB 10.8 billion, which increased 21.7%. Overall unit cost for the core express delivery business increased 14.6% or RMB 0.12, which includes KA cost increase of RMB 0.14 that was consistent with the strategic increase in KA volume. Despite cost pressures stemming from the rise of oil prices, our combined unit sorting and transportation costs decreased by 3.2% or RMB 0.02, thanks to digitization and lean operations. Specifically, unit cost of line-haul transportation decreased by 3.7% to RMB 0.32, reflecting optimized route planning and enhanced load rate efficiency. Unit sorting costs decreased 2.6% to RMB 0.24, benefiting from continued improvements in labor and automation productivity. Gross profit increased 26.8% to RMB 3.7 billion and gross profit margin rate increased by 0.8 points to 25.7%. SG&A expenses, excluding SBC, decreased 10.5% to RMB 555.5 million. SG&A, excluding SBC as a percentage of revenue declined to 3.8%, reflecting strong corporate cost efficiencies. Income from operations increased 30.4% to RMB 3.2 billion and associated margin increased 1.3 points to 22.2%. Operating cash flow totaled RMB 4.6 billion for the quarter, primarily attributable to higher operating profit, lower financing receivables and interest income realized upon maturities of long-term financial products and favorable terms on sizable fuel payables due for payment in the next quarter. Adjusted EBITDA increased 20% to RMB 4.2 billion. Capital expenditure for second quarter totaled RMB 952 million, and we anticipate the annual CapEx in 2026 to be around RMB 6 billion. Now moving on to our guidance. Considering the current economic conditions and anticipated industry parcel volume growth, we have updated our full year parcel volume growth guidance to 6% to 10% year-over-year, representing a parcel volume range of 40.83 billion to 42.37 billion. These estimates reflect management's current preliminary view and are subject to change. Now this concludes our prepared remarks. Operator, please open the line for questions. Thank you.

[Operator Instructions] And the first question will come from Qianlei Fan with Morgan Stanley. Pardon me, we have Steve Qiu with Goldman Sachs as our first questioner.

[Foreign Language] I'd like to ask a question about AI-driven efficiency gains. So I've noticed that the company has deployed 3D digital twin and [ machine ] vision technologies at its sorting hubs and upgraded voice customer service and network outlets as well as accelerate regional management decision-making. Could you share details high-level strategic thinking on digitalization as well as AI as well as your thoughts on the specific use cases in the operational workflows and where it's been implemented?

[Foreign Language]

Thank you, Chairman. And now let me translate. [Interpreted] For ZTO, the core value of the AI lives in leveraging data from over 100 million daily parcels and our mature network operations to continuously optimize network-wide costs. It creates a self-reinforcing loop of lower cost and higher efficiency, building a digital technological moat that is not easily replicated. Today, AI runs through the entire chain from pickup to delivery and has translated into tangible gains, specifically as following on the hub side or the super sortation side. In transportation, our proprietary intelligent routing and dispatch system now covers 6 most common scenarios. By optimizing routes, it unlocks idle capacity and drives improvements in load rates and shortens transit times. Route coordinated parcel volume grew 120% year-over-year and stranded parcels fell 15%. In the first half of 2026, the cost saving achieved by AI in transportation accounted for about 10% of the total reduction in transportation cost. In transit, our Smart Park system now covers all transit centers nationwide. Machine vision monitors operations in real time and flags 28 types of anomalies from congestion to missorting. Working with on-site alerts and 3D visualization dashboards, it closes the loop from detection to resolution. Uploading efficiency rose -- unloading efficiency rose 4% and anomaly traceability coverage reached 88.4%. In management, our proprietary data agent now serves more than 2,000 managers at headquarters and provincial offices, fixing the problem of static reports and after the fact manual data pulls, thus cutting the time for routing analysis by more than 90%. Now on the office side, in picking up and delivery, our precision address system now covers more than 250,000 frontline couriers with building level location accuracy of 99.98%. It supports dispatch applications from order grouping to route optimization and its accuracy keeps improving as business volumes continue to grow. On the AI customer service front, more than 90% of merchant inquiries and ticketing are now resolved through AI self-service, effectively lowering labor costs. On the consumer side, with AI stepping in earlier, customer satisfaction has risen from 80% to nearly 90%. On the management front, building on the data agent, we now push standardized best practice playbooks to more than 6,000 outlets across our network with a response rate of 88%, narrowing the capability gap across outlets and enabling proven management practice to be replicated in scale. AI has become a core strategic driver for ZTO. Looking ahead, we will continue to deepen the integration of AI across our operations, covering technological breakthroughs in converting technical breakthroughs into gains in both efficiency and service quality to further solidify our market leadership.

Your next question will come from Qianlei Fan with Morgan Stanley.

[Foreign Language] Let me translate for myself. Congratulations on a very strong profit growth in the quarter. I have 2 questions. The first question is about the reverse logistics parcels. It's encouraging to see that the retail parcels have contributed a solid foundation for our profit growth. Just wondering in terms of daily volume, what -- where are we now? And what's the implied year-on-year growth? Do we have any targets towards the peak season of this year and in next year? The second question is about the social insurance. So in this year, we start to hear more discussion about the full social insurance contribution implementation gradually pushed by regulators. Wondering what's the potential impact on our costs and operations. Specifically, historically, we have seen that industry-wide cost inflation could be passed through by industry-wide price hikes. Do you think if there are any cost inflation related with this full social insurance contribution, the industry has opportunities to pass that cost inflation through?