ZTO

Please note this event is being recorded. I would now like to turn the conference over to Sophie Li. Please go ahead.

Thank you Kelly. 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 zto.investorroom.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and Chief Executive Officer, and Mrs. Huiping Yan, Chief Financial Officer.

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 the 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 statement 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. [Non-English content]

[Non-English content]

Ok, let me translate first. Hello everyone. Thank you for joining today's conference call. In the first quarter of 2026, against a backdrop of steady macroeconomic progress and continued growth in consumer demand, China's express delivery industry maintained overall growth with parcel volume up 5.8% year-over-year. As anti-involution policies continue to deepen, pricing steadily recovered. Competition accelerated to its return to rationality and overall industry operating quality improved significantly, creating favorable conditions for leading enterprises to pursue high quality development. During the quarter, we seized the industry opportunities and delivered strong results across key metrics. Parcel volume reached 9.67 billion, up 13.2% year-over-year, significantly outpacing industry growth with market share expanding by 1.2 percentage points, further solidifying our leadership position. Adjusted net income was CNY 2.38 billion, up 5.2% year-over-year.

Excluding non-operating items, adjusted operating profit increased to 22% year-over-year, reflecting improvements in profitability. Our retail parcel volume grew 65% year-over-year. Product mix continued to optimize. Combined unit cost of transportation and sorting decreased by CNY 0.06 year-over-year, with digitalization and lean management delivering tangible results, further reinforcing our cost advantage. Our strong first quarter performance was driven by a favorable policy environment combined with our strategic focus, operating efficiency and product innovation. First, the continued improvements in the macroeconomic and consumer environment, with steady growth in online consumption alongside clear regulatory guidance and effective policy measures, provided a solid foundation and a strong support for the healthy and sustainable growth of the express delivery industry. Second, we are firmly aligned with policy direction and have been proactively upheld a healthy industry ecosystem.

As the industry leader, we consistently supported the anti-involution policy, took the lead in maintaining market order and are committed to rational and value-driven competition, working with the broader industry to build a healthy environment. Third, we stayed the course on our long-term strategy without pursuing short-term aggressive expansion and remain focused on network health, service improvement and profitability. We continue to strengthen infrastructure, deepen digitalization and enhance end-to-end management capabilities, continuously building long-term competitiveness. Fourth, through optimization of transit efficiency, through improvements in organization and refined sortation management, we achieved a further reduction in unit costs, converting cost advantages into competitive moat in profitability. Fifth, we closely checked the market demand and optimized our product mix with focused efforts on higher value retail parcels, reverse logistics, and other differentiated offerings.

This drove a structural shift from single channel e-commerce volume towards a more diversified and improved value mix, meaningfully strengthening both profitability and resilience against the business cycles. Looking ahead, we will continue to prioritize high quality development, thinking long term, and insist upon value creation. Our key priorities for the next phase are as the following.

First, fully implement national policy and industry regulatory requirements, continue to lead the industry's anti-involution efforts, safeguard a healthy competitive environment, and drive the industry toward high quality development. Second, deepen our core business internal strengths and capabilities. We will continue to advance cost initiatives for efficiency gain across all fronts, enhance timeliness and customer satisfaction, solidify our service reach, and enhance brand premium, delivering long-term value through discipline and sound execution. Third, further integrate the principles of fairness and transparency into network management.

Continue to optimize network policies and improve network management capabilities, making our policies more equitable, our management more efficient, and our network more stable and resilient. At the same time, through digitization, best practice or expertise sharing and targeted cultivation, we will help our network partners to reduce costs, improve operational capabilities and profitability, reinforcing the foundation and building a healthy ecosystem of shared success with mutual prosperity. Fourth, genuinely protect the rights and the well-being of frontline couriers. We will continue to optimize incentive mechanisms, strengthen care and recognition, ensure steady income growth for couriers and continuously enhance their sense of fulfillment, accomplishment, and professional pride, assuring the most essential of our service and operations. Fifth, continuously enhance shareholder returns.

Backed by strong profitability and cash flow, we will refine our regular cash dividend and share repurchase mechanisms, optimize our capital re-return structure, and deliver consistent returns to our shareholders. To all of our investors, our industry is at a critical inflection point, transitioning from scale-driven to value-driven development. This consolidation among leading players is apparent, and the value of the industry leaders will continue to be prominent. ZTO will stay committed to high quality market presence, high quality service, low end-to-end costs, and sound profitability.

We will relentlessly deliver on our three key commitments, which are steady earnings growth for our network partners, continuous wage improvements for our couriers, and healthy longevity for ZTO. Guided by our long-term value principles, we look forward to moving forward alongside our network partners with confidence in turning in consistently outstanding report cards to the market and our shareholders. Next, let's invite our CFO, Ms. Yan, to present the financial results and guidance.

Thank you, Chairman, and thank you, 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 results are posted on our website, and I'll go through some of the highlights here. In the first quarter, we continued to adhere to our quarterly first strategy, which is consistent with the regulatory call against involution. As our operating efficiency continues to lead the industry, we achieved increases in both volume and profit. Our parcel volume grew by 13.2% to CNY 9.7 billion, with a 1.4 point increase in market presence. Our total revenue increased 22% to CNY 13.3 billion.

Excluding non-operating factors such as government subsidies or tax rebates, which fluctuate from quarter to quarter throughout the year, our adjusted operating profit increased by 22% to reach CNY 2.6 billion. Adjusted net income was CNY 2.4 billion, which increased 5.2%. ASP for our core express delivery rose CNY 0.11, or 8.2%, driven by a CNY 0.18 positive impact from increased KA volume mix, led by higher value reverse logistics, offsetting CNY 0.09 increase in volume incentives. Increase in average parcel weight brought an additional CNY 0.02 lift to our ASP. Total cost of revenue was CNY 10 billion, which increased 22.5%. Overall unit cost for the core express delivery business increased 8.8% or CNY 0.08, which includes KA cost increase of CNY 0.15 that was consistent with the strategic expansion of our KA volume.

The combined unit sorting and transportation costs decreased by 8.8% or CNY 0.06, driven largely by economies of scale. Specifically, unit cost of line haul transportation decreased 10.5% to CNY 0.37, reflecting optimized route planning and enhanced load efficiency. Unit sorting costs decreased 6.4% to CNY 0.25, thanks to continued improvements in labor and automation productivity. Gross profit increased 20.3% to CNY 3.2 billion, and gross profit margin rate decreased slightly by 0.3 points to 24.4%. SG&A expenses, excluding SBC, increased 14.9% to CNY 594.5 million. SG&A, excluding SBC as a percentage of revenue, declined to 4.5%, reflecting strong corporate cost efficiency.

Income from operations increased 5.8% to CNY 2.5 billion, associated margin rate decreased 2.9 points to 19.2%. Operating cash flow was CNY 2.8 billion for the quarter, representing an 18% increase. Adjusted EBITDA increased 6.9% to CNY 3.9 billion, capital expenditure for the quarter was total CNY 1.8 billion. We anticipated annual CapEx in 2026 to be around CNY 60 billion. To be CNY 6 billion, I'm sorry. Moving on to our guidance. Based on current market and operating conditions, we are maintaining our previous guidance for the year that parcel volume growth of 10%-13% year-over-year, representing a parcel volume range of 42.37 billion-43.52 billion. These estimates reflect management's current preliminary view and are subject to change. This concludes our prepared remarks. Operator, please open the line for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. For the sake of keeping to time today, please limit your questions to two per person. The first question comes from Qianlei Fan with Morgan Stanley.

Thank you, operator. [Non-English content] Let me translate for myself. Thank you management for taking my questions, and congratulations on the very strong profit growth, excluding government grants. I have two questions. The first question is about unit cost. We have seen a very impressive unit cost reduction in the first quarter this year, and it has been better compared with management's full year target set at the beginning of the year. Want to discuss what's the key drivers of the cost efficiency gain in the first quarter?

Any changes to our full year cost reduction target? I specifically want to discuss the impact from diesel price hikes on unit cost going forward. The second question is about anti-involution. How has the policy initiatives playing out year to date? What's the management's outlook on industry pricing dynamics going forward in the rest of the year? Specifically want to understand whether industry price dynamics could fully pass through the potential cost inflation from diesel price hikes. Thank you.

[Non-English content]

We also implemented tier incentives for low rates, which correlated with volume levels, hence fully leverage economies of scale so as to improve overall loading efficiency. Third, we continuously improved fleet management by establishing refined standardized cost model for vehicle operations and maintenance as benchmark for our drivers, thereby lowering operating and maintenance cost continuously. In terms of sorting cost, on one hand, we continue to invest in automated equipment that is armed with digitized solutioning at our sorting hubs, utilizing real-time monitoring and upgrading old equipment to improve operational efficiency and facility automation level while controlling costs. On the other hand, we have reviewed our workforce deployment and enhanced individual accountability by a clear reward and reprimand mechanism, hereby boosting per capita productivity.

In terms of our cost per reduction targets, we expect the core transit-related costs to further decrease for the full year. Beyond transit centers, we will place greater emphasis on end-to-end cost reduction. This year, we will focus heavily on network optimization, further empowering our outlets and enhancing their operational capabilities as well. We'll continue to encourage outlets to install automated equipment, deploy unmanned vehicles, and promote direct link models to continuously reduce last mile cost. This entire end-to-end cost focus will further improve our own sorting and transit-related costs as well, because it's all integrated and interrelated. As far as the impact on the fuel prices, due to the tension in the Middle East, domestic diesel prices increased significantly in March.

As international tension continued to be managed, price has somewhat declined in late April. The price recovery driven by the anti-involution policies has largely offset the impact of high fuel costs, and certain provinces have absorbed rising diesel costs through fuel surcharges. Oil price volatility is expected to have limited impact on our total network-wide cost in the second quarter. For the question relating to anti-involution. Since the Chinese New Year, the anti-involution policy has been consistently implemented and the effects are meaningful, particularly in major high volume regions. Meanwhile, enforcement has been progressively tightened in certain provinces where implementation had previously lagged.

As the policy continues to take effect, the volume of low price parcel has continued to shrink, driving a further recovery in price level and effectively restoring the level of interest of both outlets and couriers. Benefiting from this improving competitive environment, the company has achieved simultaneous growth in volume and pricing with restoration of market share. As the industry leader, ZTO remains committed to stay closely aligned with the government's anti-involution initiatives. We will continue our balanced development strategy that prioritizes service quality while effectively safeguarding the rights and interests of our last mile network. We are confident that with productive regulatory guidance, the industry will develop in a healthier manner, more orderly competitive competition, and also pricing level will be stable overall.

Your next question comes from Steve Keung with Goldman Sachs.

[Non-English content] Thanks management for taking my questions. I'd like to ask the questions on AI. ZTO was an early mover in large scale adoption of electronic waybills and automated sorting in the past, which established a first mover advantage. I want to ask, in the AI era, how do you consolidate and expand this technology leadership? Could you share what initiatives have already been implemented as well as your outlook on how AI will empower the various stages of the express delivery value chain going forward? Thank you.

[Non-English content]

Thank you for your question. Our core strategy is to continuously deepen integration of our AI technology across the entire network, including transition from cost reduction and efficiency enhancements to operational empowerment. The tangible results achieved to date are primarily reflected in three areas. One. Sorting operations. The combination of 3D digital twins and machine vision technology has been deployed across around 25 or so sorting centers, reducing the missorting rate by over 60%, while significantly lowering labor costs. Two. Customer service. Our AI-powered customer service system now automatically process over 70% of end-to-end service tickets.

All agents such as Wenxiaotong cover more than 80% of daily business inquiries from network outlets. In the first quarter, the rate of customer service escalations to human agents was further reduced by 5 percentage points. Three. Last mile dispatch. Leveraging our proprietary high-precision mapping data, we have applied AI in scenarios such as last mile post site selection and delivery route optimization.

This has helped large network outlets reduce short distance transportation costs by 20%. In the retail parcels business, our AI system now support the clear dispatch of tens of millions of daily orders. In an era of large language models, we are advancing their evolution of implementation by from execution tools to operational decision-making partners. Our smart data inquiry system has been deployed across various domains, including customer analytics, route planning, e-commerce platform service index monitoring, operational performance analysis, service quality assessment and inbound cost management for network outlets.

As a result, the time required for operational decision making at the regional management level has been shortened from several days to just hours. Looking ahead, we will continue to build a multi-agent architecture that enables the system to autonomously provide optimization recommendations across various operational functions. Within the next six months, we plan to complete the upgrade of our voice customer service AI, which will be deployed across nearly 6,000 network outlets nationwide. In summary, AI technology and its implementation has become a core strategy prioritized for ZTO. We will continue to translate technological advancements into cost and time efficiency advantages, further solidifying our leadership position and generate long-term value for our shareholders.

Your next question comes from Aaron Luo with UBS.

[Non-English content] Uh, let me translate myself. Thank you management for taking my question. I have two of them. First, we have observed that industry growth has decelerated against the backdrop of the anti-involution trend. Could you please kindly share your latest outlook on industry growth expectations and whether the competitive landscape is experiencing accelerated divergence? Second, regarding our retail parcel business, could you please kindly provide an update on its current development status and the parcel profit level at this stage? Thank you so much.

[Non-English content]

Thank you for your question. Your first question relates to the industry growth and competitive landscape. As the anti-involution policy continues to advance, low price competition is gradually diminishing. The industry is shifting from extensive scale-driven expansion to higher quality development based on operational efficiency. Following a period of adjustment, the industry's growth trajectory has become more pragmatic, with the focus shift from more sheer parcel volume growth to sustainable growth driven by synergistic improvements across scale, profitability and service quality. The nature of competition in the express delivery industry involves a comprehensive contest of service quality, cost advantage and network capability.

As the industry transitions towards higher quality development, market share is expected to further consolidate among top players, and the competitive landscape is becoming even more polarized. The competitive focus has shifted from price driven to relying on comprehensive strength. ZTO is committed to pursuing both volume and quality growth. On one hand, we will solidify our leading position in parcel volume while sustaining our brand premium, which is based on service reach and stability. On the other hand, we will further strengthen our cost advantage and widen the service quality gap versus peers. This will drive concurrent gains in both market share and operating efficiency, enforcing our leading position in the industry.

Your second question relating to our retail parcel businesses. The rapid development of our retail parcel business, specifically the reverse logistics parcels, is an outcome of our volume quality balanced strategy and our commitment to build a tiered product portfolio amid the industry's high quality development. In Q1, average daily retail parcel volume reached approximately 9.7 million, which indicates a meaningful growth rate. In the second quarter, our reverse logistics parcel volume further increased with our average daily volume exceeding 9.4 million. Although the price of reverse logistics parcel has slightly declined due to competition, the unit cost has continued to optimize through economies of scale and refined cost management. Currently, the unit profit contribution of reverse logistics parcel remains higher than that of our traditional e-commerce parcels.

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Your next question comes from Mujin Lin with CITIC Securities.

[Non-English content] So first of all, thank you for picking me up, and I guess my question will go with the legislation of the protective rights of delivery workers. So as we can see that the legislation of protecting the rights of delivery workers is being gradually implemented in places like Guangdong and Shandong and so on. So how should we envision the pace of the Social Security promotion? If it is gradually implemented in the second half of the year, would that be any guidance regarding to the quantitative impact on the cost of the entire network? [Non-English content]

[Non-English content]

Thank you very much for your question. I'll translate and supplement for Chairman's answer. Since the establishment of our shared success philosophy and practice, we place a high priority on the rights and interests of our network partners and frontline couriers. We believe that the implementation of Social Security coverage is aligned with the objective of anti-involution policy, as both aim to safeguard frontline workers' interests and promote healthy industry development. We welcome the early implementation of Social Security policies. In the short term, the rollout of these policies may lead to an increase in per parcel cost. However, from a long-term perspective, establishing a more stable and secured employment system will enhance network cohesiveness, reduce workforce turnover, and further solidify the quality of our last mile services.

As an industry leader, ZTO will continue to lead by example to promote the sector's compliant, compliance high quality development. If more specific Social Security implementation measures are introduced, we will proactively respond to the government's call and fully support policy implementation. As we have been previously communicating that, on our consolidated group, our compliance level with the Social Security is much higher. Yes, indeed, at the outlets level, there are various different practices. There the major impact perhaps will come from the network partners, and we will be supportive in helping our network partner to become compliant and also help them reducing costs as what we are currently implementing is indeed will generating results to help them coping with any additional cost increases coming from the Social Security policies implementation. Hope that answers your question.

Okay. Thank you.

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

Thanks everybody for joining us for the call again today. We have generated positive results and performance going forward are continuously relying on our strategy of a balanced approach with quality first and scale and volume improvements with reasonable level of profit that is equitably shared among our brand participants. Going forward, we look forward to speaking with you again and thanks again for your support and attention.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.