ZTO Express (Cayman) Inc. Q1 FY2026 earnings call

Industry Context

• The China express delivery industry grew 5.8% year-over-year in parcel volume in Q1 2026. Anti-involution (anti-cutthroat competition) policies have stabilized pricing, normalized competition, and improved overall industry operating quality, creating favorable conditions for high-quality growth of leading firms.

Q1 2026 Core Operational Results

• ZTO's total parcel volume grew 13.2% year-over-year to 9.67 billion parcels, outpacing industry growth and expanding market share by 1.2-1.4 percentage points, solidifying the company's leading position.
• Adjusted operating profit (excluding fluctuating non-operating items like government subsidies) grew 22% year-over-year to $2.6 billion; adjusted net income grew 5.2% year-over-year to $2.38 billion.
• Product mix continued to optimize, with digitalization and lean management driving cost reductions that reinforced ZTO's cost advantage.

Strategic Priorities

• Policy & Industry Leadership: ZTO, as industry leader, fully supports and leads industry anti-involution efforts to maintain a fair, orderly competitive environment and promote industry-wide high-quality development aligned with national regulatory requirements.
• Long-Term Strategic Discipline: Rejects short-term aggressive expansion, and remains focused on network health, service quality improvement, and stable profitability to build long-term competitiveness.
• Product Mix Optimization: Prioritizes development of higher-value segments including retail parcels and reverse logistics, shifting the business from single-channel e-commerce dependency to a diversified, higher-value portfolio to improve profitability and business cycle resilience.
• Cost Efficiency: Continues to reduce end-to-end unit costs via automation, digitalization, and refined management, converting cost advantages into improved profitability and competitiveness.
• Network Partner & Frontline Worker Support: Commits to fair, transparent network management, helps network partners reduce costs and improve profitability, and protects the rights and welfare of frontline couriers to secure stable income growth and long-term network stability.
• Shareholder Returns: Will refine regular cash dividend and share repurchase mechanisms backed by strong profitability and cash flow to deliver consistent, sustainable returns to shareholders.

ZTO Express reports its core business as express delivery, with segment performance as follows: 1. Core Express Delivery: Total revenue grew 22% year-over-year to $13.3 billion. Average selling price (ASP) rose 8.2% (11 cents), driven by product mix shifts toward higher-value business, partially offset by volume incentives. Total cost of revenue increased 22.5% year-over-year to $10 billion, with an overall core business unit cost increase of 8.8% (8 cents) including higher key account (KA) costs aligned with strategic KA volume expansion. Combined unit sorting and transportation cost decreased 8.8% (6 cents): unit line haul transportation cost decreased 10.5% to 37 cents, and unit sorting cost decreased 6.4% to 25 cents. 2. High-Value Retail/Reverse Logistics (Retail Parcel): Parcel volume grew 65% year-over-year, with average daily volume reaching 9.7 million parcels in Q1 2026, growing further to over 9.7 million average daily units in early Q2. This segment contributes 10% of total parcel volume, and its per-unit profit contribution is higher than that of traditional e-commerce parcels.

• Maintains previous full-year 2026 guidance for parcel volume growth of 10% to 13% year-over-year, representing a total parcel volume range of 42.37 billion to 43.52 billion parcels.
• Confirms full-year 2026 capital expenditure guidance of approximately $6 billion.

• Volatility in global oil prices, driven by geopolitical tensions such as Middle East conflict, could increase transportation costs, though management notes recent diesel price increases have been partially offset by anti-involution policy-driven price recovery and fuel surcharges in some regions, with expected limited full-network impact in Q2 2026.
• Rollout of mandatory social security coverage for frontline couriers could increase per-parcel costs for network outlets in the short term, though ZTO's consolidated compliance level is already higher than peers, and the company is positioned to help network partners absorb additional costs via ongoing efficiency improvements.
• Sustained low-price competition in the reverse logistics/retail parcel segment could compress margins for this high-value business, though current unit cost optimization via scale has kept profitability above traditional e-commerce parcels.
• All forward-looking results are subject to unknown risks and uncertainties that could cause actual performance to differ materially from management projections, as outlined in ZTO's SEC filings.

Q: What drove Q1's better-than-expected unit cost reduction, are full-year cost reduction targets changing, and what impact will rising diesel prices have? How have anti-involution policies performed year-to-date, and can industry prices offset diesel cost inflation?

A: Q1 cost improvements came from expanded automation adoption, deepened digital tools, and refined management, which improved vehicle load rates and per-capita labor productivity. Transportation costs fell from optimized routing, tiered load rate incentives, and standardized fleet management, while sorting costs fell from upgraded automated equipment and improved workforce accountability. Full-year core transit and sorting cost reductions remain on track, with new focus on end-to-end last mile cost reduction via outlet network optimization and automation. Recent diesel price increases have been largely offset by industry price recovery from anti-involution policies, with limited expected full-network impact in Q2. Anti-involution policies have tightened enforcement across regions, shrinking low-priced parcel volume and restoring industry pricing stability, and ZTO remains aligned with policy to sustain healthy competition.

Q: How will ZTO expand its technology leadership in the AI era, and what is the outlook for AI empowerment across the express value chain?

A: ZTO has already delivered tangible AI results across three core areas: AI-powered 3D twins and machine vision in sorting hubs cut missorting rates by 60% and reduced labor costs; AI customer service handles 70% of service tickets, reducing human agent escalations by 5 percentage points in Q1; and AI-optimized last mile routing and site selection cut short-haul delivery costs by 12-20% and supports tens of millions of daily retail orders. AI is now expanding from execution tools to operational decision support, cutting regional decision time from days to hours. Going forward, ZTO will deploy multi-agent AI architecture and roll out upgraded voice AI to 6,000 network outlets within six months, continuing to convert AI advancements into cost and efficiency advantages.

Q: How has industry growth changed amid anti-involution policies, is competitive divergence accelerating, and what is the current status and profitability of ZTO's retail parcel business?

A: Anti-involution policies have shifted the industry from low-quality scale expansion to stable, sustainable high-quality growth, with the focus shifting from pure volume growth to balanced growth across scale, profitability, and service quality. Competition is now based on comprehensive strength (service, cost, network capability) rather than price, and market share is increasingly consolidating among top industry players, creating greater polarization in the competitive landscape. ZTO will continue to grow volume while strengthening its cost and service quality advantages to gain market share and consolidate its leading position. For retail/reverse logistics parcels, Q1 average daily volume hit 9.7 million units, growing further in Q2. While prices have declined slightly due to competition, scale and refined management have reduced unit costs, and per-unit profit contribution still remains higher than traditional e-commerce parcels.

Q: What is the expected pace of social security policy rollout for couriers, and what impact will it have on network-wide costs?

A: ZTO welcomes early implementation of social security policies, which align with anti-involution goals of protecting frontline worker interests and supporting healthy industry development. Short-term rollout will modestly increase per-parcel costs, but long-term stable employment will reduce turnover and improve service quality. ZTO's consolidated compliance level is already relatively high, with most impact falling on network outlets, and ZTO will help outlets achieve compliance and offset additional costs via ongoing efficiency improvements, as the company's current cost reduction initiatives are already generating measurable savings.