Operator:

Good day, and welcome to the ZTO Second Quarter and Half Year 2025 Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Sophie Li, Head of Capital Markets. 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 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 Mr. Huiping Yan, Chief Financial Officer. Mr. Lai will give a brief overview of the company's business operations and highlights followed by Mr. 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 the 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] Meisong Lai: [Foreign Language] Sophie Li: Thank you, Chairman. Please allow me to translate first. [Interpreted] Hello, everyone. Thank you for joining today's conference call. In the second quarter of 2025, the express delivery industry continues to maintain a robust growth, with business volume increasing by 17.3% year-over-year. ZTO adheres to its quality-first principle, and with an industry-leading service level, we grew parcel volume by 16.5% year-on-year to reach 9.85 billion and increased market share sequentially. Despite fierce market competition, ZTO achieved an adjusted net income of RMB 2.05 billion. During the quarter, the trend towards a higher proportion of light and small parcel in the industry remains as more merchants opted for more economical or affordable extra delivery services. The value from ZTO's premium pricing power underpinned by our extensive network scale and leading service quality and stability was not fully realized. In some regions, particularly major production zones with extreme price competition, the volume growth came in lower than expected. In stark contrast, ZTO's retail parcel volume grew over 50% year-over-year. Since last year, we have continuously focused on enhancing volume mix and upgrading service capability and efficiency. Leveraging ongoing improvements in service quality such as timeliness, guarantee and coverage expansion, retail parcels volume peaked over 8% of total volume during the quarter. This mix optimization of volume structure alleviated the pressure from volume-based subsidies, bringing positive unit contribution of CNY 0.17 in revenue and CNY 0.02 in gross profit for the core express delivery business. Additionally, by further implementation of digitization of information and intelligent operations, optimizing resource allocation and assigning responsibility with clear accountability, we attained RMB 0.07 or productivity gain over the same period last year for combined unit cost of transportation and sortation. This achievement not only reflected our strategic commitment to improving operational capabilities and efficiencies but also validating the differentiated, high-quality products and services are the most critical elements for forging comprehensive competitive edge for the future. A healthy and stable eco network and long-term confidence of franchisee partners are the foundation for the sustainable development of express delivery franchising model. ZTO's enduring philosophy and practice of shared success aligns well with government and regulatory authorities' intention and emphasize on safeguarding grassroots interests. Backed by excellence in an efficient and strong operational system, we consistently empower our network partners to achieve win-win. Our initiatives aimed at effectively addressing front-end empathy in price competition are steadily progressing forward with the following core focuses. First, optimizing network policies. Systematically identify outlets cost through a various stage of pickup and delivery, ensuring rational policy alignment, standardized policies across similar outlets to improve transparency and fairness. Implement precise incentive mechanisms tailored to market reality and avoid blind and excessive subsidies. Second, enhancing last-mile efficiency. Install various automated sorting and transportation equipment at suitable outlets to reduce manual work and improve efficiency. Reduce outlet costs through direct dispatch to last-mile posts, allowing couriers to focus more time and energy on pickup and delivery. Third, incentivize retail response and fulfillment, further unifying goals and objectives and enforce profit allocation gravitated towards couriers so that they become self-motivated to be responsive and timely in serving retail customers with increasing loyalty, hence, achieving greater earnings. Fourth, redefine value proposition of last-mile post while providing industry solutions to reduce delivery costs. Integrate last-mile post with lockboxes, convenience stores and other community living and commerce contact points to establish multidimensional convenient and efficient consumer connections. After more than 20 years of rapid development, China's express delivery industry has built the world's largest scale and most efficient operations and have become one of the pillar industries of China's socioeconomic growth. As a key participant, ZTO has fully demonstrated that leading scale and operational efficiency are the cornerstone and core driving force for a sustained healthy development. The industry dynamics are evolving and the shift from volume-driven expansion to balanced growth in both quantity and quality is evident and inevitable. Peer competition will elevate from basic delivery elements to comprehensive logistics solution powered by digitization, intelligent and smart operations in the final competitive landscape. Looking back, we have overcome adversity and earned a seat in the industry. Through relentless effort and ingenuity, we followed and surpassed. Over the past decade, no matter the changes in the macroeconomic and industry changes, we have maintained course in our own path. achieving leadership in quantity, quality, scale and profitability. Behind the ZTO brand are tens of thousands of employees and partners united in a shared mission, that is, while solving problems for others, we can afford better living of our own, and we can bring happiness to more people. Looking ahead, the new economic and competitive environment has put new challenges in front of us. We firmly believe in the vast growth prospects of China's express delivery and the broader logistics industry. ZTO's unique culture, robust infrastructure and franchisee network, solid financial strength will support our long-term strategic vision and ambition. With steadfast execution, we will be able to collaborate with our partners to deliver long-lasting value for others and the society as well as returns to shareholders. Now let's invite Mr. Yan to go over the financial results and guidance. Huiping Yan: 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, we continued to prioritize quality, which helped to drive volume expansion and cost optimization. Our parcel volume reached 9.8 billion, which grew 16.5%. Adjusted net income decreased 26.8% to CNY 2.1 billion, largely attributable to competition-based price decline. ASP for the core express delivery business decreased 4.7% or CNY 0.06, and the breakdown are the following: CNY 0.05 decrease from the decline in average weight per parcel and CNY 0.18 decrease from higher volume incentives. These decreases were partially offset by a CNY 0.17 positive contribution from increase in KA volume, mainly comprised of headquarter contracted reverse logistics products and services. Total revenue increased 10.3% to CNY 11.8 billion as a combined result of volume increase and price decline. Total cost of revenue was CNY 8.9 billion, which increased 25.1%. Overall unit cost for the core express delivery business increased CNY 0.07 to CNY 0.89. Combined unit cost of sorting and transportation decreased 11.1% or CNY 0.07 for the quarter, benefiting from economies of scale and various productivity gain initiatives. Specifically, unit cost for line-haul transportation decreased 14% to CNY 0.33 given enhanced route planning in conjunction with optimizing fleet operations and lower fuel cost. Unit sorting costs decreased 7% to CNY 0.25, benefiting from automation and labor efficiency. Unit KA costs increased CNY 0.15, which was in line with KA volume growth. Gross profit decreased 18.7% to CNY 2.9 billion, and gross margin rate dropped 8.9 points to 24.9%. SG&A, excluding SBC, grew 5.9% to 621 million. SG&A expenses, excluding SBC as a percentage of revenue, declined to 5.2%, reflecting strong corporate cost leverage. Income from operations decreased 23% to CNY 2.5 billion and associated margin dropped 9.1 points to 20.9%. Operating cash flow was CNY 2.2 billion for the quarter, representing a 37.7% decrease primarily due to higher advances for expanded reverse logistics services and increased dividend without withholding tax payments. Adjusted EBITDA decreased 18.5% to CNY 3.5 billion and capital expenditure for second quarter totaled CNY 1.1 billion, and we anticipate the annual CapEx in 2025 to be CNY 5.5 billion to CNY 6 billion. Now moving on to our guidance. We are revising our parcel volume guidance to be in the range of 38.8 billion to 40.1 billion, representing a 14% to 18% annual increases. Putting it into context, without any question, quality is first. Then volume is mission-critical to us. Meanwhile, there are no excuses for subsidies that are unproductive to us, a brand operator or to our network partners. That is what we mean by reasonable earnings. By assessing current market and operating conditions and given the visibility we have into the industry development for the second half of the year, we trust in the operational team's commitment in delivering volume growth at pace with the industry average for the year, hence, keeping ZTO's market share intact. Above assessments and estimates represent management's current and preliminary view, which are subject to change. Now this concludes our prepared remarks. Operator, please open the lines for questions. Operator: [Operator Instructions] Today's first question comes from Qianlei Fan with Morgan Stanley. Qianlei Fan: [Foreign Language] Let me translate for myself. Thank you management for taking my questions. And thank you for the management and all stakeholders' efforts in market share and profitability and service quality improvement. So I have 2 questions. The first question is about the outlook for the second half of this year for this industry. We noticed that in our volume guidance, the implied volume growth for the second half of this year, actually, the range is quite a wide one. And management also mentioned to still aim to grow in line with the industry. That said, this wide range of growth outlook is mainly because of potentially a lot of uncertainties in growth for the industry. So what could be the key factors that potentially impact the second half '25 market growth outlook? My second question is about technology and AI's application. What are the new efforts and initiatives that we have adopted in this year? And what's the impacts we have seen from these efforts on cost efficiency gain or on revenue generation or on service quality improvement? Meisong Lai: [Foreign Language] Huiping Yan: [Interpreted] Thank you very much for your question, and I'll translate for Chairman. Indeed, our volume growth was below our expectation that we set in the beginning of the year. Second quarter, however, we have seen that the sequential increase in our market share, specifically months May and June, we had experienced higher than industry average growth. Looking at the trend, for the whole industry for January through July, the growth was 18.7%. And for the month of July, it was 15.1%. So we do see a slight slowdown for the industry, and then we believe that second half of the year would most likely be lower in its growth rate than the first half of the year. With that said, though, we would still continue to focus on our work, that is, to achieve balanced improvements in growth for quality of services, volume and profit. Overall, we think that the recent market dynamic shift with some of the region's price increases, smaller logistic fee type of packages would mostly be impacted. And hence, in other words, it would most likely be shrinking in its volume. So we've considered many factors such as these to adjust our overall guidance. Yes, indeed, it is in a wide range because, again, there are still many uncertainties in the macroeconomic environment as well as in the industry competitive dynamics. So we do have an annual 14% to 18% guidance provided. Second question, in the recent years, ZTO has directed attention and resources towards lean management and digitization to transform the way we make decisions and solve problems. Going forward, we will further integrate AI tools across all business segments, continuously driving cost efficiencies in serving the last-mile fulfillment for our outlet operators, for the frontline couriers so that they are able to reduce cost. This year, some of our key initiatives included one at the sorting center level, the developed or developing 3D digitized parallel model that enables remote management and real-time monitoring provided automated early warning capabilities. And this model has allowed us to reduce frontline management head count by 1/3 and has cut missorting rates by more than 60%. In the last-mile scenario for its planning, we are applying AI to scenarios such as site selection, design of the specifics of the direct linkage solution and direct delivery routes, empowering outlets to improve their intelligent planning capabilities. At the customer service front, we have embedded AI-powered service agent system into merchants' aftersales support channels. These agent systems autonomously handle over 2 million aftersales requests daily, covering more than 90% of merchants service needs. This not only significantly reduced costs for our outlets customer service operations, but also allowed 7 days a week, 24 hours a day service availability. At the employee level, we have launched the knowledge-based Ask Xiaotong program, which now serves on average, over 10,000 users daily. Through natural language queries, employees can quickly obtain accurate business knowledge and operational directions, hence, effectively improve response time and reduce rates of errors. I hope that answers your question. Operator: And our next question today comes from Luo Dan with Guosen Securities. Dan Luo: [Foreign Language] Let me translate myself. How do you view the sustainability of the current price increase in Guangdong? And what's the impact of price increases in Guangdong on company profits? Meisong Lai: [Foreign Language] Huiping Yan: [Interpreted] Thank you very much for your question. As it's evident that the first half of the year, the competition is quite fierce. In order for the industry to continue to grow, we must shift from price-driven volume to quality of services in order to win market presence for the long run. We believe the industry will eventually return to census, and price competition is a short-term behavior. Since August 5, the whole industry in Guangdong does have a slight price adjustment. It's a positive adjustment upward. The lowest price for the industry right now is RMB 1.40, slightly improved compared to before. The impact to the company is less significant as it's mainly for improvements in relieving pressure for outlets and for the couriers so that they are able to receive higher delivery fee. As far as how it would sustain, we believe we tend to believe that there is a good possibility and good chance for it to last. Operator: And our next question today comes from Aaron Luo with UBS. Aaron Luo: [Foreign Language] Let me translate myself. I have 3 ones. The first one is also about pricing. We know that the price competition in the first half is very intense, but following the anti-involution campaign, we already noted some price hikes already started in some industry key regions. So what's your views on the pricing development in the remaining of the year and also beyond? And the second question is about unmanned vehicles. We noted that we have a very close cooperation with some leading providers. So just curious about our current development on this progress on this and also how much of a benefit we could see from this driving up our last mile delivery efficiency, also the cost benefit? The last question is about our shareholder return. Do we still see further room on improvement in terms of payout and share buybacks? Meisong Lai: [Foreign Language] Huiping Yan: [Interpreted] Now let me help translate and supplement where necessary. The first half of the year, the price pressure is quite significant and the competition is really fierce. In the past, typically, in the high season, price will return as opposed to in the low season, capacity need to be filled and the price will be low. For 2024, it wasn't as such because during the high season, the price largely remained stable. In the beginning of this year, all the way through July, we have observed price decline and the trend remained. Post August, the anti-involution initiatives did help slight increase in the market price. For those that are significantly below cost, price practices were being strictly dealt with and addressed. We think in the future, no matter if the competition heat up to or slow down, for express delivery price to come in below RMB 1 is not feasible because, again, this is a cost-based pricing system. And we even strongly believe, in the long run, a sustainable competitive landscape needs to go from price competition to value and capability competition. For the second question relating to autonomous vehicles, overall, ZTO has entered into commercialization in the early but successful testing stage of utilizing autonomous vehicles, drones and other self-driving technology. And we are actively collaborating with industry leaders. Most of the industry leaders are not only developing their technology based on the AI, autonomous driving technology development itself, which is rapid and also applying real-case scenarios. We are one of the very application scenarios that's well fitted. At the same time, we have been leveraging our in-house serving and mapping qualifications because we do get that certification to make our own maps. We have developed the capability to generate high-precision maps to serve the delivery process. We have completed the parallel digitization model for over 50 sorting centers, enabling real-time visualization of all operating elements, including personnel, vehicles, parcels and equipment facilities so as to support remote intelligent monitoring and control. These technology initiatives will continue to enhance network efficiencies and strengthen our core competitiveness. Autonomous vehicle have been also commercially deployed at some of our outlets and have shown significant results in cost reduction. We have over 700 outlets in over 200 cities where the road permits were available that employs in total of over 2,000 autonomous vehicles to serve their delivery purposes. And this year, to further elaborate that, the headquarter has accelerated the promotion of autonomous vehicles among outlets by offering central procurement and providing discounts in assisting in road right of way negotiations. In the second quarter, we reached a strategic cooperation agreement with a leading autonomous vehicle company to jointly explore the implementation of autonomous vehicle in last-mile delivery scenarios and further enhance the performance and reliability. At the same time, since we do have a last mile focus, we have established an autonomous vehicle logistics platform to promote industry standardization. Currently, we have been working very closely with top autonomous vehicle company such as Neolix, et cetera, in rolling out in the future more and more, into more and more cities. We have 240 cities goal. We wanted to deliver more than 200,000 parcels daily with autonomous capabilities. At the outlet level, typically, the historical method of delivery, including vehicles and drivers, would cost about CNY 0.12 to CNY 0.15 each. But with the autonomous solution, the cost would go down to somewhere around CNY 0.08. So that is a significant reduction. Now on the third question on our shareholder payback and return of shareholder value. The company has and will comprehensively consider both dividend and share repurchase as measures to gradually but consistently increase shareholder returns. Currently, we do have sufficient cash reserves and also strong cash generation capabilities, and we are arranging a reasonable capital flow structure. For repurchasing of the shares decisions, we are closely monitoring the market trend and stock performance while taking into account some of the uncertainties in the marketplace as well as our flexibility of financial arrangements. So going forward, we will continue to monitor and allocating capital and cash and increasing shareholder returns. Operator: Our next question today comes from [ Lisa Lee at Gold Securities ]. Unknown Analyst: [Foreign Language] So I just wonder, what do you think about the potential impact on the overall e-commerce industry and the industry parcel volume growth from the increase of the parcel price. So as management mentioned before, higher parcel price may depress on low-end parcel demand and the industry parcel volume growth may be slowing down in the second half. So for the longer term, what do we see about the higher parcel price compared to the growth of overall e-commerce industry? So what do you expect the government, maybe a balance the growth and a balance thein ? Meisong Lai: [Foreign Language] Huiping Yan: [Interpreted] It is, in my opinion, that the proper term to describe the recent trend should be that the price is on a return to sensibility. The competition in the recent past is the price and cost is disconnected. Nowadays that you see the lowest price in Guangdong is around RMB 1.4. But indeed, it is not necessarily impacting all or majority of the delivery practices. The authorities paid attention to those extreme pricing practices that are well below the costs. The intention is to protect the interest and benefits of many of the operators in the delivery businesses, including outlets and the couriers. Majority of the merchants, their price is still reasonable and the impact of the price adjustments or returning of the sensibility is less impactful to them as opposed to for those extreme portion of small and light packages. We think that the differentiated product and services is important to our customers, to merchants as well as to consumers. So we all see that it is easy to reduce price, but price reduction doesn't create value. The future of competition for this industry lies with quality of services, differentiated products and services to meet different demand or needs. So we think that, and I strongly believe, it has always been that the impact is less at this point. And going forward, the longer-term betterment of this industry is to shift from price competition for volume to quality of services, gaining both economic gain as well as volume increases. That is the only way to have a sustainable growth for the industry. Operator: This concludes our question-and-answer session. I'd like to turn the conference back over to management for closing remarks. Huiping Yan: Thank you very much for everyone joining on today's call. and we are anticipating conversations with you and discussions with you for anything that you have questions on, and thank you again. Operator: Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]