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Edited Transcript of ZTO.N earnings conference call or presentation 19-Nov-19 1:00am GMT

Q3 2019 ZTO Express (Cayman) Inc Earnings Call

SHANGHAI Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of ZTO Express (Cayman) Inc earnings conference call or presentation Tuesday, November 19, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Huiping Yan

ZTO Express (Cayman) Inc. - CFO

* Meisong Lai

ZTO Express (Cayman) Inc. - Founder, Chairman & CEO

* Sophie Li

ZTO Express (Cayman) Inc. - IR Director

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Conference Call Participants

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* Baoying Zhai

Citigroup Inc, Research Division - VP & Head of the Hong Kong and China Transport

* Melissa Chen

China Renaissance Securities (Hong Kong) Limited, Research Division - Analyst

* Ronald Keung

Goldman Sachs Group Inc., Research Division - Executive Director

* Xin Yang

China International Capital Corporation Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the ZTO -- to announce third quarter financial results on December 18, 2019 (sic) [November 18, 2019], conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Sophie Li, please go ahead.

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Sophie Li, ZTO Express (Cayman) Inc. - IR Director [2]

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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 are available on the company's IR website at ir.zto.com. On the call today from ZTO are Mr. Meisong Lai, Chairman and the 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 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. Lai Song?

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Meisong Lai, ZTO Express (Cayman) Inc. - Founder, Chairman & CEO [3]

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(foreign language)

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Sophie Li, ZTO Express (Cayman) Inc. - IR Director [4]

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Please allow me to translate for Chairman first.

[Interpreted] Hello, everyone. Thank you for joining us on today's conference call to discuss the company's third quarter results. During this quarter, ZTO maintained industry-leading service quality and customer satisfaction and delivered 3.06 billion packages, an increase of 45.9% year-over-year or 18.4 percentage points higher than the industry average. Our market share rose 2.3 percentage points year-over-year to 18.9%.

Meanwhile, we delivered $1.32 billion of adjusted net income, a 24.6% growth from the third quarter last year. By focusing on our strategic goals, ZTO captured strong growth momentum in the third quarter as we achieved profit target while ensuring high quality of service and customer satisfaction.

First, our recalibrated network policies for 2019 have been taking [good]. More and more local markets saw ZTO widen its volume lead and obtained regional advantages. Second, with greater [volume comps magnified] economies of scale, we were able to leverage infrastructure resources we have accumulated over the years as well as multigenerational enhancements in automation and transportation capabilities. Combined with sorting hub and line-haul transportation costs per parcel declined 10.7% from [CNY 0.90]. Third, we increased the efforts in educating our network partners to grasp the strategic importance of resource planning for last-mile operations. We encouraged our network partners to proactively prepare for significant volume increase and establish cost competitiveness. The annual Singles' Day on November 11 has long been an industry-wide exercise to test the extremes for pickup, sortation, transport and delivery for an express delivery company. On November 11, ZTO's order exceeded 200 million and parcel volumes surpassed 100 million. On November 12, our total parcel volume exceeded 10 billion for the year of 2019. Tens and thousands of [ZTO-zens] were extremely proud of this milestone accomplishment, and we vow to stay vigilant and true to our mission and uphold our sense of responsibilities and urgencies as we continue to charge forward.

2019 is nearing an end, and in the coming days, we will remain focused on empowering our network partners to build up their comprehensive capabilities, including stronger last-mile presence. We will inspire and support our frontline personnel to become self-motivated and therefore with entrepreneurial spirit. We will remain focused on increasing capabilities with better timeliness and higher cost efficiencies. Through data analytics and benchmarking, we aim to establish a healthy competitive atmosphere among regions for faster sharing, learning and improving and to raise the bars for overall operational excellence.

We will remain focused on attention to details and making better assessment of the policy impact, hence, achieving finer balance between sales and fulfillment regions. Take advantage of the existing regional advantages, stay alert for market changes and continue expanding our value advantage across the nation. We believe the strong domestic consumption needs are supportive of a healthy growth prospect, and that the Chinese Express delivery industry will continue to maintain steady growth momentum. Through an arduous journey in the past 17 years, ZTO surpassed it from behind. And if we were to outperform our peers and attain superior advantage and evolve ultimately towards equal advantage. We have a long road ahead. We must be thankful for the great area we are in. Stay on course to what we want to accomplish. Treasure our partners and carry out each task earnestly.

With that, I thank you for your attention. Next, let us hear from Ms. Yan who will discuss the financials.

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Huiping Yan, ZTO Express (Cayman) Inc. - CFO [5]

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Thank you, Chairman Lai, and hello to everyone on the call. As I go through our financial results, please note that unless specifically noted, all numbers quoted are in RMB, and percentage changes refer to year-over-year comparisons. Detailed analysis of our financial performance, unit economics and cash flow summaries are posted on our website, here and I will only highlight some of the key points.

ZTO delivered a strong volume growth this quarter and exceeded our earnings expectations without compromising quality of services. Our volume grew nearly 1 billion parcels, the speed that is 18.4 percentage points faster than industry average. Consequently, our market share rose 2.3 points to 18.9% for the quarter. Total revenues for our core express delivery business were approximately CNY 5 billion, which grew 26.6% as a result of mixed effect of 45.9% volume increase and 13.2% price decrease due to incentives given as the necessary competitive measures during the quarter.

Revenues for key accounts were approximately CNY 619 million, an increase of 31.7% on a 50% volume growth. KA accounts represent less than 10% of our total volume.

Total cost of goods sold increased 26.1%. Volume-correlated sorting and transportation cost grew 37.8% and 31.7%, respectively, as a result of scale leverage and very effective cost control. The net effect is that gross margin rate decreased 1 percentage point from last year to 30.3%. Income from operations grew 28.3%, and SG&A, excluding SBC as a percentage of revenues decreased to 5.3% compared to 5.6% last year. We continue to demonstrate sound corporate cost advantage.

Higher amounts for tax rebate and government subsidies this quarter helped the 0.8 points op margin rate increase. Adjusted net income grew 24.6% to reach CNY 1.32 billion. And adjusted net income rate was 24.6% compared to 25% last year, relatively stable.

Last, turning to unit economics per parcel. ASP decline was CNY 0.25, out of which CNY 0.23 was associated with volume incentives. Competition remained relatively intense, partially in sales regions -- particularly in sales regions during the third quarter. Cost of goods sold went down by CNY 0.14 per parcel, of which, CNY 0.11 came from line-haul transportation and sorting hub cost savings. The increased use of self-owned vehicles with increasing proportion of higher-capacity trailer trucks helped drive down unit transportation cost by CNY 0.6. The increase in the number of automated sorting equipment helped to keep headcount low and sorting hub cost per parcel also went down by CNY 0.05. With better SG&A leverage adding back another CNY 0.02, adjusted operating income per parcel declined by CNY 0.06.

Operating cash flow was CNY 1.42 billion, and CapEx spending was CNY 1.71 billion, which brings year-to-date total CapEx spending to CNY 3.44 billion. Our annual CapEx commitment remains to be CNY 6.8 billion as we expect cash outlay to be around CNY 4 billion to CNY 5 billion for the year.

In summary, we delivered a strong third quarter on both market share gains and earnings expansion. Our strategy is sound, and our resource advantage and execution capabilities continue to support accelerated volume increase and operational stability for thousands of our network partners.

We left our annual guidance unchanged at this time. Our track record has well-demonstrated ability -- our ability to consistently achieve our set goals. given the most recent market conditions in October performance to date, we are very confident that we are well on our way to deliver on our set target.

This concludes our prepared remarks. Operator, please open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Melissa Chen with China Renaissance.

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Melissa Chen, China Renaissance Securities (Hong Kong) Limited, Research Division - Analyst [2]

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(foreign language) I'll translate for myself.

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Meisong Lai, ZTO Express (Cayman) Inc. - Founder, Chairman & CEO [3]

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(foreign language)

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Sophie Li, ZTO Express (Cayman) Inc. - IR Director [4]

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Go ahead.

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Melissa Chen, China Renaissance Securities (Hong Kong) Limited, Research Division - Analyst [5]

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So my first question is on the full year guidance for this year. So I'm just wondering, are being a little bit conservative on the full year guidance? If so, like what are our concerns for the 4Q? And for the second question, it's on the sorting cost per parcel. Actually, we already have 208 automated sorting equipments for this quarter, which have been already be in place. Some I'm just wondering for the 4Q '19 and also for the 2020, are we going to saw -- are we going to see more like cost savings in terms of the sorting cost?

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Meisong Lai, ZTO Express (Cayman) Inc. - Founder, Chairman & CEO [6]

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(foreign language)

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Sophie Li, ZTO Express (Cayman) Inc. - IR Director [7]

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[Interpreted] Okay. For the first question, the guidance. We have been demonstrating our ability to deliver on our set goals, and we are always prudent in communicating with our performance targets. And the goal set for the year, it is not our habit to change them and the fact that we are looking at our performance for the first 3 quarter and also looking at the fourth quarter, we are confident and we are well on our way to achieve the goal.

On the second part of our question, we -- at the end of 2018, we have installed -- we installed 129 small parcel automation lines in our sorting hubs this quarter compared 78 equipment lines in the third quarter of 2018 this is a large increase. We also installed 79 sets of large sorting equipment in around 42 sorting hubs. We added also couple of hundred dynamic weighing machines to better process and replace some of the manual works that was done before. Parcel sorted through our automation equipment accelerated to about 66% of total parcel, and automated sorting equipment line partially used -- it will be partially used offset increase in the labor costs. As understand, labor cost is about 70% of our sorting hub cost, which indicates that we still have plenty of room to improve. And the fact that in the fourth quarter, so far, what we've seen, especially during the Double 11 period, our cost performance is much better than last year as well. So we are confident that there are still lots of room to grow in terms of obtaining cost effectiveness.

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Operator [8]

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Our next question comes from Ronald Keung with Goldman Sachs.

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Ronald Keung, Goldman Sachs Group Inc., Research Division - Executive Director [9]

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(foreign language) I have 2 questions. First we just want to hear management's view on the 2020 outlook, basically given how the 2019 growth has been very really strong for the industry, ASP's have fallen as a result, but also the unit cost have been quite successful in unit cost cuts. And result, the EBITDA per parcel has fallen, but you still delivered a very strong profit growth. So into the 2020, how are we seeing announced unit cost cuts? How much room do we have? And that how that really impacts your pricing strategy leading to the outlook for profit per parcel?

Second question is on just the franchisee, if you could share how your network partners have been doing based on the surveys and the strong year in volume growth, how have the profits been? If you can share any color on the health of our network partners.

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Meisong Lai, ZTO Express (Cayman) Inc. - Founder, Chairman & CEO [10]

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(foreign language)

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Sophie Li, ZTO Express (Cayman) Inc. - IR Director [11]

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[Interpreted] Okay. For the first question, our outlook for 2020 is very positive. We believe the express delivery industry in China will continue to grow steadily, and it's very likely another 10 billion parcel growth for 2020, and that is very possible. And this is based on the track record and also an analysis of the domestic consumption needs, which is still very strong. For our cost-effectiveness gain, we still believe there are plenty of room, especially next year, we are looking to install more large sorting equipment. Also with digitization and also technology involvement, some of our operational excellence will continue to evolve and with volume increase and the scale leverage, we have better opportunity to realize cost efficiency going forward.

On the second part, with the impact potentially on our partner -- network partners, 2 points we want to make that -- with, of course, first of all, the volume growth as a backdrop of our overall industry. But because of the volume advantage, ZTO is able to provide more volume to our network partners, which enhance -- help -- which hence, help them in decreasing the cost on pickup and the delivery end. Roughly, we estimated about CNY 0.10 advantage in that area. And then secondly, our brand -- the brand brings about recognition of our stable services and quality of services. So on average, our price is CNY 0.10 higher than our peers. This translates into confidence as well as room for growth for our network partners. Our assessment, especially throughout this year, in relative terms compared to our peers, our network partners are more stable and more confident. And -- as we adjust forward to -- if we look forward into 2020, we -- as we continue to focus on volume growth and market share gain, our network partners will, again, be our effective allies and also our partners in achieving our overall goal.

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Operator [12]

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(Operator Instructions) Our next question comes from Baoying Zhai from Citi.

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Baoying Zhai, Citigroup Inc, Research Division - VP & Head of the Hong Kong and China Transport [13]

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(foreign language) Sorry, my first question is on pricing. We're actually seeing a little bit weaker than expected prices of third quarter and wondering how the prices would look like in the fourth quarter, especially during the peak season, if the decline will be narrowed. Besides, I also want Lai Song to give us an outlook about the competition strategy of next year, at least the peers is waiting for our move first.

Second is on the last mile delivery construction because we have been seeing it's a very important focus this year. And can we get more latest stats of the post stations number and the percentage of the parcels is put in the [Asia -- the] lockers or the post? And how do we think the future target of the percentage of the parcels in the lockers and post station?

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Meisong Lai, ZTO Express (Cayman) Inc. - Founder, Chairman & CEO [14]

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(foreign language)

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Sophie Li, ZTO Express (Cayman) Inc. - IR Director [15]

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[Interpreted] On the first question, as we look at the long-term trend of the price, it is stabilizing. If we look at the near-term though, we do expect the price competition continue to be fierce. And for, specifically, fourth quarter, we did increase our price, especially during the peak season, we typically increase our price each year. And looking at the fourth quarter, we are experiencing lesser price incentives, if you will, for the fourth quarter.

On the second question, on the last mile, Chairman indicated there are 2 aspects for us to pay attention to. The first is the physical location or the post operations or last-mile outlets. We have coordinated our efforts with Cainiao. And so far for the year, there are about 5,000 new posts added under the Cainiao post brand. In addition, ZTO's also expanded its own footprint on last milepost operations. All together, there are nearly 30,000 post locations that we have established.

The second aspect is regarding people. We've mentioned before that it is important for us to, even though they are not our employees, the last mile couriers have great touch points with our consumers, with our customers. So help them managing the existing volume and the incremental volume is important to us. We strive to empower them to go from being an employee to exercise more of their proactiveness as well as becoming more and more so entrepreneurs. As a result -- of course, our effort will continue to expand. As a result, the third quarter, we've seen [C2C] pickups, volume had some increase, and that is a good sign. When you have people that are profitable, they find this way of doing business is supportive of their effort, then quality of services will increase, again, establish a positive cycle so that our last mile presence will be with greater mass and also greater quality.

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Baoying Zhai, Citigroup Inc, Research Division - VP & Head of the Hong Kong and China Transport [16]

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(foreign language) So may I follow up on the parcel ratio, which will be put in, into the post stations or the lockers, how much percentage you think it will be achieved in the future because they say the most important cost reduction area in the future?

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Meisong Lai, ZTO Express (Cayman) Inc. - Founder, Chairman & CEO [17]

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(foreign language)

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Sophie Li, ZTO Express (Cayman) Inc. - IR Director [18]

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[Interpreted] Okay. The current packages going through the last milepost is around 40%. And going forward, because of the volume -- expected volume increase, we believe it's inevitable that the percentage will continue to increase. The -- and in addition to that, it's not only a choice that we have to make but also it is a very good strategy or an area for further reduction of the cost throughout the whole pickup-delivery chain.

Chairman supplemented on part of price. Our strategy has consistently been on a basis of quality of services as well as volume -- as well as targeted profit growth, we will continue to expand market share. If you look at these 3 set factors or set goals for us, consistently in the past, we've been seeing increase on all 3 front with well-balanced approach. Going forward, we will still be focusing on in these 3. But according to the market condition, we will dial up and down in terms of which is more priority.

As you see in 2019, we've set our goal to grow faster to accelerate our growth, to pull further away from our peers and going into 2020 is the same. We believe with our advantage in terms of our infrastructure and also our technology and execution capabilities to achieve greater market share gain to pull further away from the group -- they go from what -- using Chairman's term, relative advantage to superior advantage to eventually evolve into an equal advantage. This is in our playbook, and we are having our sights set on another fast-growing 2020.

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Operator [19]

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(Operator Instructions) Our next question comes from Xin Yang with China International.

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Xin Yang, China International Capital Corporation Limited, Research Division - Analyst [20]

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(foreign language) Okay. So I have the translation myself. The first question is that as Mr. Lai just mentioned that we have been -- we have built up an absolute advantage in some area, I just wonder, which area you are meaning to? And the second question is about the guidance on market share. What is your new guidance for next year? And also for the midterm market share guidance, for example, for -- like [2023] or maybe longer term?

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Meisong Lai, ZTO Express (Cayman) Inc. - Founder, Chairman & CEO [21]

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(foreign language)

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Sophie Li, ZTO Express (Cayman) Inc. - IR Director [22]

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[Interpreted] The first question, our strategy remains that we will maintain our quality of services and attain our profit goal and accelerate our market share gain. That -- during the quarter, we mentioned that some of our regions, particularly those non-sales regions, including Midwest and also Northwest regions, their growth are faster than our ZTO's total average growth. So we've seen the regional advantage being established.

The -- going forward for our market share goal, by 2022 to achieve 25%, that is still on track. And we are confident to achieve that goal.

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Operator [23]

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Our next question comes from [Nikki Qui] with [Travest].

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Unidentified Analyst, [24]

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(foreign language) I have 2 questions. First question is about our key accounts. Just wonder whether we have changed our strategy for the key accounts. And second question is about the CapEx. It seems like we lowered our CapEx budget for the whole year. What's the reason behind that?

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Huiping Yan, ZTO Express (Cayman) Inc. - CFO [25]

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Thank you, [Nikki] for your questions. With regards to KA, we haven't changed our strategy, and the strategy's still intact. The key accounts does require nationwide service and also a higher quality of standards. What we've done in the third quarter is we've been going through recalibration of the pricing strategy and also looking at various regions the performance demands that is necessary for -- to serve our KA accounts. And again, the growth is healthy. In terms of our total volume, it still stands around less than 10%. So nothing has changed.

On CapEx spending, there's one element. We are continue to -- we continue to focus on building our infrastructure, including acquiring land use rights. Now this is something that's not within our own control, the supply and also the timing of when the government offer such resources for acquiring, and that impacted our overall pace in cash spending. Now the overall goal is to still CNY6 billion to CNY 8 billion CapEx commitment, and so far we spent CNY 3.44 billion. And it's still within our CNY 4 billion to CNY 5 billion range of CapEx spending.

That answers your question, Nikki ?

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Unidentified Analyst, [26]

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Yes. Thank you, [Yan].

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Operator [27]

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

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Huiping Yan, ZTO Express (Cayman) Inc. - CFO [28]

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Thank you, everybody, for joining us for the call. And once again, the company has left its guidance unchanged, and we are confident to deliver on the full year goal that we've set. So far, the business performance has been very promising and the fourth quarter, including the Double 11, we've achieved -- we delivered great results in surpassed -- we break new records. Separately on another thing, the November 25 is our inaugural Investors Day and we look forward to seeing you all and sharing with you what's happening here at ZTO, and also our outlook to what's to come for us going forward. Thank you very much.

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Operator [29]

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]