Good day, and welcome to the ZTO Express Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sophie Li, Company Secretary. Please go ahead.

Thank you, operator. 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 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 related events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict in a manner 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]

[Interpreted] Hello, everyone. Thank you for joining today's conference call. In the second quarter of 2023, while maintaining a high level of service quality, ZTO grew its volume by 23.8% year-over-year with a total of 7.68 billion parcels, further expanding our market share to 23.5%. Meanwhile, through enhanced revenue structure and process management, we improved overall operational efficiency and achieved an adjusted net profit of RMB 2.53 billion, representing a 43.9% year-over-year growth. Relative to a pandemic affected low base of last year, the express delivery industry's overall parcel volume grew 20.9% in the second quarter of this year. Depending on varied priorities for scale and profit, each brand implemented different competitive strategies. ZTO has consistently pursued sustainable profitable growth, focusing on long-term growth and competitive advantages. In the second quarter, we executed the following key tasks initiatives, which helped generating solid performance results. First, we revamped the talent reserve program and through systematic evaluation, quickly replace those who could not keep up. With a strong talent pool and pipeline buildup under a complete [ emulate surpass ] atmosphere, our team of [probation] managers are becoming younger yet more prepared to take on greater challenges. Second, we exceeded expectations on cost optimization. In the second quarter, we continue to implement operating process standardization and further refine our evaluation matrix to be more detailed and quantifiable. Our ability to correlate process data to specific behavior of a workstation or individual task operator improved. This enabled us to flat anomalies promptly and effectively rectify problems with precision. Third, we refined volume cost profit tools and further the implementation across the operational network. We sort through the methodologies for pricing, revenue and cost sharing between sorting centers and outlets. This effectively enhanced the profitability of our entire network and further widen our industry…

Thank you, Chairman, Lai. Hello to everyone on the call. When 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, ZTO maintained profitable growth, thanks to sound execution of our consistent corporate strategies. Our parcel volume increased 23.8% to 7.7 billion, growing the quarterly market share by 0.5 points to 23.5%. The adjusted net income grew 43.9% to RMB 2.5 billion. Total revenue increased 12.5% to RMB 9.7 billion. ASP for the core express delivery business decreased 7.8% or RMB 0.10, mainly driven by lower average weight per parcel, increases in volume incentives and a mix shift impact from decrease in KA volume whose revenues are recorded to include delivery fees. Total cost of revenue was RMB 6.4 billion, which decreased 0.3%. Combined unit cost of sorting and transportation decreased 15.7% or RMB 0.12. Specifically, line-haul transportation costs per parcel decreased 14.7% to RMB 0.42, mainly attributable to better economies of scale, optimize line-haul route planning, improved low rate and decreased fuel cost. Unit sorting costs decreased 17.4% to RMB 0.25, driven by scale leverage, increased level of automation, improved standardization in operating procedures and optimized performance evaluation systems. Gross profit increased 50.0% to RMB 3.3 billion as a result of increased revenue and cost productivity gain. Gross profit margin rate increased 8.5 points to 33.9%. SG&A expenses, excluding share-based compensation, as a percentage of revenue, dropped 0.1 points to 5.3%, demonstrating a healthy corporate cost structure and leverage. Income from operations increased 45.0% to RMB 2.9 billion and associated margin grew 6.6 points to 29.6%. Operating cash flow was RMB 3.76 billion for the quarter and EBITDA was RMB 3.88 billion. Capital expenditure totaled RMB 2.2 billion for the quarter, and we are anticipating annual CapEx to be in the range of RMB 6.5 billion to RMB 7.5 billion. We are on track to achieve another year of free cash flow. Now moving on to guidance. Taking into considerations the current market conditions and our operating situation, the company reiterates that its annual volume guidance to be in the range of RMB 29.27 billion to RMB 30.24 billion, representing a 20% to 24% increase year-over-year. Relative to the entire industry performance, the company remained committed to achieve at least 1.5 percentage point increase in volume market share for the year. These above estimates represent management's current view and preliminary assessment, which are subject to change. Now this concludes our prepared remarks. Operator, please open the line for questions. Thank you.

[Operator Instructions] And our first question will come from Ronald Keung of Goldman Sachs.

[Foreign Language] Very quickly on -- management talked about the industry -- Express industry reaching a critical point. This is while we have delivered very strong profit growth while increasing market share, but we have seen some of the smaller players starting to cut prices and become more aggressive. So do we see this as a temporary kind of act from the smaller players? Will the kind of extending into the fourth quarter peak season this year and how do we assess this round of price cuts from smaller players? Second is about service quality and our end-to-end delivery time to share some of the metrics there and compared with peers. And how do we plan to widen our differentiation, not just from end-to-end time but any value-added business or anything that we're planning to maintain our service leadership?

[Foreign Language]

[Interpreted] Thank you very much for your question. First question is really, in essence, about the trend of the pricing going forward. It is typical that during a year, around September and October, the pricing will be about 10% higher than August and July because of the seasonality of the year. Also in November, the price will further increase because the access capacities will then gradually be utilized. The pricing for the market during the second quarter fluctuation, we believe it's more driven by the seasonality. ZTO has consistently focused on the approach that is balance across the quality of services, volumes, market shares and profit. Our principle is eliminating loss-making transaction. What we've done differently compared to some of our competitors is that we extended our policy from March and April into May and June instead of making changes to them. So, maintained stability in our entire network. Your second question is relating to linkage. First of all, we do have a systematic plan on improving, first of all, our quality services and timeliness because under the same pricing, higher quality of services will attract more volume. What we've done in two aspects in our operational is that, first, each of the transit linkage, we will push it to its extreme improving productivity, improving correlation between segments -- different segments of our process of sortation, transportation, improving the route planning and so on and so forth. Those are the typical initiatives that we have implemented all along. And then the second area, which is what we have referred to in the past called tri-layer throughput. In the past, our advantage is a better connection between the outlets and our sortation centers. Going forward and then really starting these past couple of years, we've been slowly but surely building the…

The next question comes from Qianlei Fan of Morgan Stanley.

[Foreign Language] Congratulations on a very solid second quarter results despite the very aggressive pricing competition in the industry. I have two questions. The first question is about competition. Very glad to hear that the company's strategy has not changed in the second quarter versus the first quarter to maintain a stable pricing compared with some very aggressive competition from our peers. We noticed that in the second quarter, the market share gain of the company was 0.5 percentage points on a year-on-year basis. Considering management mentioned the target of 1.5 percentage point year-on-year market share gain target remains unchanged, does that mean we will be more aggressive in market share competition in the second half of this year? Or it is because we think because of the utilization issues, some of the peers may lose market share because they don't have the handling capacity? And also, Mr. Lai mentioned earlier that we will lock in the bottom line. So what's the bottom line of the competition strategy if the market -- the industry competition comes more aggressive than expected? And the second question is about cost. So very glad to see the second quarter unit cost drop was much significant than expected. So at a earlier meeting, management guided around 5% to 7% drop in unit cost for the full year. So considering the second quarter, we have achieved better than that towards the outlook for the second half of this year in terms of unit profit. And also, what's the outlook for the next two years?

[Foreign Language]

[Interpreted] Thank you very much for your question. First question is really about the price competition. In fact, surely, we have observed that during the second quarter, the price fluctuation becomes extremely volatile. From one perspective, what we have done is, as I described earlier, we didn't change our pricing from May and June -- from March and April all the way throughout May and June. Because indeed, as you look at our decrease in ASP, in essence, aside from the objective reasons, we subjectively have allocated or given profit to the pickup in the delivery end. Our market share did only increase 0.5 points because we do believe that in the longer term, ZTO with the largest scale and strongest competitive advantage, we are also taking on the role of a stable agent to ensure that the entire industry is stable and especially during the economic recovery. From our personal sentiment, we are all coming from the same place. We come from the villages. And we all know that we are not trying to create detriments to anyone. And we're just simply using the excess capacity. So if we take on the price actions severely, it would -- because of our scale and influence will really impact the entire industry, which really not what we intend to do. So we are hopeful that typically in starting in September, the volume will recover, and the whole industry will enter into a higher season. Although its installed base and capacity will be utilized and each of the players will become more sensible in matching their capacity and resources to their pricing strategies. One thing we've done differently now is that ZTO make pricing decisions based on the direction of our routes, which is more granular and we have more visibility. In…

The next question comes from Thomas Chong of Jefferies.

[Foreign Language] I have two questions. The first question is about our long-term market share expectations. Given that we have talk about the 1.5% market share gain, just want to see how our market share will be trending in the long run? And my second question is really about the parcel mix. Given that we are seeing some changes in the consumer behavior given the macro backdrop, are we seeing the rate of the parcel is having some changes in terms of the heavy weight and the light weight parcel. And how will that affect the cost per parcel trend?

[Foreign Language]

[Interpreted] Thank you for your question. Your question really relates to the competitive strategy. So on that, ZTO has always focused on building our own competitive strength and remain stable and profitable -- remain focused on stable and sustainable profitable growth. The Chinese express delivery industry, it has been apparent that when you have cost advantage, you have scale and you have a high level of quality of services, you will attract greater market share. In essence, express delivery is about value. It's a value proposition with a level of high quality of services, customers will gravitate towards those who have high efficiency or low cost or a reasonable cost. The market is fair. In the past, we have demonstrated and it is evident that when we focus on all three of our corporate focus, i.e., quality, services, market share as well as our own profitable development, our market share continually improve and increase. We do believe the -- and more importantly, for an entire network to be healthy and growing, especially because in China, the franchised model we have been, in all throughout our years, focusing closely on the equitable allocation of courier outlet and our company as a brand operator. Each of the players need to focus on fair allocation and sustainable growth going forward. We believe if you reference to the developed market in China, there will be concentrated market share in a few players, and this has been the trend we've been seeing the concentration in our market share in the past several years. As long as you have a high quality of services, you are also building up scale and efficiency and differentiated competitive advantage, we believe the longer-term market share concentration will continue to demonstrate itself. Second question relates to the product mix or parcel mix. Indeed, in the second quarter, we have observed that not only just us, including our competitive partners in this space, they also experienced lower parcel -- average -- lower parcel weight. And this is indeed, as you have observed and mentioned, the consumer shopping behavior has been evolving and changing towards more sporadic shopping. For us, some of our main e-commerce package production regions, the packages will be lighter, yet we believe more of the inland to the north and south, we are having our regions with more agriculture product coming up, for example, that will be heavier. As we are developing a pricing strategy based on routes, we will match the load rate of our transportation resources and our space -- operational space and equipment with the sortation center as well as our network partners and in that sense, determine what the appropriate pricing needs to be for a different set of product mix going forward.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, everybody, again, for joining us today. Sometimes it takes a step back to take the two steps forward, and we are maintaining our stamina in looking into longer term and also with our financial resources and our competitive strength, we have much greater flexibility in playing offensive or defensive going forward. Opportunities are ahead for us to look not just at the second half of the year when volume will increase, we are also looking forward to many years ahead where we will continue to take a leadership in profitable growth. Thank you again for your continued support, and we look forward to speaking with you soon.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]