ZTO Express (Cayman), Inc. Q4 FY2023 earnings call

• In Fiscal Year 2023, China Express Delivery industry had relatively strong growth momentum but faced price competition. ZTO's annual parcel volume grew 23.8%, core express delivery unit price declined, but cost productivity gain absorbed the price decline, and adjusted operating margin rate increased 4.3 percentage points to 26.7%, with adjusted net income for the year at RMB 9 billion, a 32.2% increase over 2022. • Focused on balance among quality of services, market share, and earnings. Addressed microeconomic uncertainties, e-commerce structure shift, and industry competitive dynamics by improving service quality, differentiating service capability, eradicating unprofitable volume, directing customers to capable network partners, and increasing incentives to protect market presence. • Stable and healthy development of partner network is the foundation of ZTO's longevity. Implemented initiatives like partner capacity and capability building, existing facilities upgrade, resource utilization enhancement, last mile expansion, and service quality/customer satisfaction improvement. • Achieved significant cost productivity gain in 2023. Total unit costs decreased, benefited from scale leverage, digitization, and lead management initiatives. Labor efficiencies and resource utilization improved, and ability to adjust and solve problems enhanced. • China Express delivery had stable growth in the first 2 months of 2024. New e-commerce channels like video streaming and retail social network stimulated consumption. Future work focuses on safety healthy volume base, fair allocation of economic interest, supporting frontline operating efficiencies, optimizing scale advantage, improving service quality, enhancing data accuracy, etc.

In Fiscal Year 2023, ZTO's annual parcel volume grew 23.8% to reach RMB 32.2 billion. Core express delivery unit price declined RMB 0.16 for the year. Total revenue for the year was RMB 38.4 billion, an 8.6% increase. Total cost of revenue for the year was RMB 26.8 billion, a 1.6% increase. Gross profit for 2023 increased 29% to RMB 11.7 billion, and gross profit margin rate increased 4.8 points to 30.4%. For the fourth quarter of 2023, volume reached RMB 71 billion, adjusted net income was RMB 2.2 billion, total revenue was RMB 10.6 billion (an 7.6% increase), total cost of revenue was RMB 7.5 billion (a 5.5% increase), gross profit was RMB 3.1 billion (a 12.8% increase), and gross profit margin rate was 29.5% (a 1.4% increase). The core express delivery business ASP for the year decreased 11.3% or RMB 0.16, and for the fourth quarter decreased 18.2% or RMB 0.27. Combined unit cost of sorting and transportation for the year decreased 13.2% or RMB 0.11, and for the fourth quarter decreased 14.9% or RMB 0.13. Unit cost of last mile haul transportation for the year decreased 4.1% to RMB 0.45, and for the fourth quarter decreased 11.5% to RMB 0.46. Unit sorting costs for the year decreased 15% to RMB 0.27, and for the fourth quarter decreased 20.1% to RMB 0.26.

• Anticipates the express delivery industry in China would grow 10% or more in volume in 2024 and will maintain leadership in industry transformation towards profitable growth with both quantity and quality. • Plans for 2024, parcel volume is expected to grow in the range of RMB 34.73 billion to RMB 35.64 billion, representing a 15% to 18% increase year-over-year. • Announced a RMB 0.62 per share cash dividend for 2023 to shareholders, representing a 40% payout ratio and a 68% increase from the previous year. For 2024, plans to declare and pay cash dividends semiannually, no less than 40% of the company's distributable profit for the fiscal year. • Upsized 2016 share repurchase program by USD 500 million to bring the total authorization amount to 2 billion and extend the program by another 12 months until June 30, 2025.

• Industry price competition is difficult to predict and can be intense, which may impact earnings. • Microeconomic uncertainties, e-commerce structure shift, and industry competitive dynamics are factors beyond the company's control that could affect performance. • Policy changes or new regulations in the express delivery industry could bring about uncertainties and potential impacts on operations and costs.

Q: Ronald Keung asked about competition on pricing front, EBIT or profit trend in 2024, and CapEx expectation and dividend payout room.

A: Meisong Lai said in 2024, they expect parcel volume growth 15% - 18% which is above industry average. Regarding competition, in the long run, competition will subside as low-price market share isn't sustainable. For CapEx, details weren't fully specified but cash generation allows for strong free cash flow and committed to increasing shareholder returns.

Q: Fan Qianlei asked about competition intent, whether worst seen, unit profit outlook, and impact of regulatory delivery requirements.

A: Meisong Lai said competitive environment shifts with economic development. Focus is on improving service quality, differentiated products, etc. On regulatory requirements, new rules emphasize improving customer satisfaction and logistic experiences, which is consistent with their work and benefits the industry in shifting towards service quality.

Q: Unknown Analyst asked about areas of transformation or adjustment and pricing strategy.

A: Huiping Yan said the long-term strategy remains, price competition isn't sustainable, and focus is on growing from quantity to quality with balanced approach.

Q: Aaron Luo asked about 2024 initiatives, advantages over peers, and quantitative goals.

A: Meisong Lai said they'll focus on improving service quality, managing profit and market share balance, optimizing resources at sortation centers, improving transit efficiency, and setting volume growth target of 15% - 18% with higher growth in retail or non-economy volumes to differentiate from peers.