Full Truck Alliance Co. Ltd.

Ladies and gentlemen, good day and welcome to Full Truck Alliance's third quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mao Mao, Head of Investor Relations. Please go ahead.

Thank you. Please note that today's discussion will contain forward-looking statements relating to the company's future performance, which are intended to qualify for the safe harbor from liability, as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and discussion. A general discussion of the risk factors that could affect FTA's business and financial results is included in certain filings of the company with the SEC. The company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. Joining us today on the call from FTA, senior management are Mr. Hui Zhang, our founder, chairman, and CEO, and Mr. Simon Tsai, our CFO. Management will begin with prepared remarks and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, a webcast replay of this call will be available on our investor relations website at ir.fulltrackalliance.com. I will now turn the call over to our founder, chairman, and CEO, Mr. Zhang. Please go ahead, sir.

Okay, I'll start. Hello, everyone. Welcome to the third quarter of 2021. First of all, I would like to inform you about the progress of the network security review. Currently, the review is still in progress. We are also very actively cooperating with the supervision department to review. We hope that this review will have the lowest impact on the company's business. We believe that the security of network security and related data security is a must-have requirement. It is also conducive to long-term health development in the industry. From internal organizational structure, technical process, etc., we have already established a better data and network security protection system. We also welcome the strengthening of data law and the security of supply and demand platforms. Okay. Hello, everyone. Thank you for participating in our 2021 third quarter conference call today. First, I'd like to give you an update on the cybersecurity review of our Winmaman and Huochabang apps.

The investigation is still ongoing and we are fully cooperating with the Cybersecurity Review Office to facilitate a smooth review process as we strive to minimize the impact on our business growth. We firmly believe that an optimized regulatory environment is both necessary and beneficial for the long-term healthy development of the industry. To this end, we have established a comprehensive data and network security protection system internally. We welcome the strengthening of data security regulations and freight platform supervision, and we will spare no effort to promote the healthy and sustainable development of the road transportation industry as well as the protection of truckers' interests. 第三季度,尽管我们受到新用户暂停注册疫情,包括极端天气,多重因素的影响,

Our team has set very high internal requirements and goals, and we strictly implement various operating strategies to promote solid forward-looking business. In the third quarter, our platform's turnover of GTV reached 6.73 billion yuan, which increased by 48.8% in total. Our turnover of orders reached 3,530 million yuan, which increased by 78.4% in total. The average number of goods delivered reached 1.61 million people. The total revenue of the third quarter is 12.4 billion yuan, which is 68.9% of the total revenue. The net loss under the US accounting system is about 4.7 million yuan. In general, we are very stable in terms of operations and finance. The revenue scale has also been gradually expanded with the improvement of our transformation ability.

Now turning to our third quarter earnings results, despite the absence of new external user growth, recurring COVID-19 related disruptions, and extreme weather conditions in part of China, our team has set high goals and rigorously executed our operational strategies to drive solid growth in the third quarter. Our total GTV rose to RMB 67.3 billion during the quarter, an increase of 48.8% compared with the prior year period. Also, we witnessed a significant increase in the number of fulfilled orders, up 78.4% year-over-year to 35.3 million, as well as a 32.2% year-over-year increase in average shipper MAUs to 1.61 million. Our total net revenues reached RMB 1.24 billion, an increase of 68.9% year-over-year. Under non-GAAP measures, our adjusted net loss in the third quarter of 2021 was RMB 4.7 million. Overall, we are pleased with our financial and operational achievements. Our revenue is rising as we enhance our monetization capability and continuous improvement in our key operating matrix illustrates the sustainability of our business model and our robust overall growth.

We will continue to give back to society with sincerity.

As we move forward, we will continue to sharpen our technological edge, broaden our logistic network, and provide our new and existing users with superior products and services, making FDA the go-to platform for shippers and truckers' logistic needs. We will embrace President Xi's latest guidance with respect to the digital economy and promote deep integration between digital technology and the real economy as we fully leverage our data analytic capabilities and rich application scenarios to empower the transformation of conventional industries. At the same time, we will prioritize our social responsibilities, lead with integrity, and give back to society. Whether it be through our public welfare foundation, disaster relief efforts, or pandemic support, our goal is to spread positivity and be a source of

inspiration to the world around us.

With that, I will now turn the call over to our CFO, Simon Tai. He will elaborate more on some initiatives taken during the quarter and go over our operational and financial results in more detail. Please go ahead, Simon.

Thank you, Mr. John, and hello, everyone. We are glad to have delivered another quarter of strong operational and financial results. I would now like to walk you through some details of our third quarter operations, beginning with our platform. We continue to grow our logistic network, and we are excited to see our platform's positive network effects develop and intensify. Fulfillment rates were up 10 percentage points to 27% compared with 17% in the prior year period. Additionally, we reduced average transaction time by 29% year-over-year from 21 minutes to 15 minutes in September. This improvement was mainly attributable to greater matching efficiency supported by our expanding data algo capabilities and relentless focus on user experience. While we encounter supply and demand imbalances in certain regions due to the suspension of new user registration and the COVID-related disruptions, which slowed the sequential growth of GTV, we do not believe these short-term fluctuations will affect our long-term business development. Going forward, we aim to utilize our advanced big data technology to generate more structured data. improve order entries, standardization, and refine data analysis. We also believe the rollout of our recommendation-driven model will take our matching efficiency and user experience to a new level. Moving on to our users, given the suspension of new user registration disorder, increasing both user engagement and retention of existing users became our top priority. These efforts yielded further improvement in two important metrics. Average shipper miles grew more than 30% year-over-year to 1.6 million during the third quarter, while average trucker miles remained stable, with 3.5 million active truckers fulfilled shipments on our platform in the past 12 months. Our already high shipper and trucker retention rates remain steady. 12-month retention rate of paying shippers and next month's retention rate of truckers who responded to shipping orders on our platform were approximately 85%. FTA delivers the benefits of efficient and convenient logistics services to our users through our unwavering pursuit of technological advancement. To that end, we continue to devote resources to key operational areas in third quarter including in-depth data mining and label system enrichment. We have significantly improved our platform's matching efficiency by leveraging technology to create more sophisticated portraits of shippers and truckers, including their shipping habits, cargo type preferences, price sensitivity, and time preferences. To maintain our competitive technological advantage, we strive to attract and develop high-caliber algo and data talents. Our algo team has benefited greatly from their extensive industry experience and technological expertise. As we move forward, we'll continue to increase our data accumulation and algo capabilities to build an industry-leading platform to empower sustainable growth. Just one year after its launch, our online transaction service is proving to be a very powerful growth driver, representing 14.7% of total revenue in the third quarter, compared to just 1% in the prior year period. Given increased market recognition and positive user feedback, we accelerated its growth track during the quarter, adding 35 cities to extend our commission coverage to 95 total cities. as of September this year. We continue to earn commissions through diversified products and formats, while boosting the commission penetration rate and maintaining a stable truck retention rate during the quarter. Truckers' next month's retention rate in these 95 cities reached nearly 90%, a testament to the sustainability of our closed-loop commission business model. The commission model will become a major growth engine for our platform going forward, To capitalize on this momentum, we expect to expand the commission model to more cities and steadily increase the commission rate as we provide our users with more services and greater value. To improve our user experience on our platform and safeguard truckers' rights and interests, we recently unveiled an all-encompassing protection program to cover a wide range of dispute scenarios. In August this year, we added compensation for eight additional scenarios, including idling, deposit refund, breach of contract, and late payment, among others. To date, we have assisted truckers in recovering freight from 129,000 orders with a total transaction value of RMB 298 million. As a result, customer satisfaction with respect to complained settlement rose from 74% in July this year to 91% in September, including a satisfaction rating of over 95% for deposit and idling complaints. Next, I'd like to give you an update on our new initiatives. Our Intercity and LTL shipping services, which we see as a natural extension of our current FTL business, are still in the testing phase in a limited number of cities. We expect to devote more resources to these services and launch them in additional cities in the coming years to meet existing shippers' diverse demands. We also extended cooperation with Senopac, one of our key strategic partners and shareholders. During the quarter, we have provided refueling services to more than 60,000 truckers through over 400 gas stations in Sichuan Province and Chongqing City. effectively lowering truckers' fueling costs and enhance their stickiness. Looking ahead, we'll continue to collaborate with Sinopec as well as other strategic partners along the value chain to explore and create additional value-added services. With respect to the buildup of our road transportation ecosystem, we are exploring software as a service solutions for logistics to enhance our problem-solving capabilities. As an example, We invested in a leading logistics SaaS supplier in China, targeting small and medium-sized dedicated line companies, thus laying the foundation for future breakthrough in the LTL business and synergies throughout the SaaS TMS value chain. We will continue to make selective and complementary investments to upgrade our logistics infrastructure. Before I move on to financials, I'd like to reiterate that we have been committed to reducing transportation industry's environmental impacts since our inception. Our platform reduces truckers' empty loads and help eliminate fuel waste, thereby significantly reducing carbon emission. In collaboration with the Transport Planning and Research Institute of Ministry of Transport, FDA conducted environmental impact research and recently published a report indicates that FTA's platform reduced FTL truckers' carbon emission by close to 12 million tons in 2020. We also further reduced truckers' carbon footprint by providing other matching services, such as LTL truck pulling. Now I'd like to provide a brief overview of our third quarter 2021 financial results. All financial numbers presented today are in RMB amounts, and all percentage changes refer to year-over-year changes unless otherwise stated. Our total revenue, mainly consisting of revenues from freight matching services and battery added services, or RMB, $1,241.7 million in the third quarter of this year. This represents an increase of 68.9% from RMB $735 million a year ago, primarily attributable to an increase in revenue from freight matching services. Revenues from freight matching services in the third quarter were RMB $1,085.2 million, representing an increase of 102.6% from RMB $535.6 million in the same period last year. The increase was primarily due to an increase in revenue from freight brokerage service, as well as rapid growth in transaction commissions. As part of our freight matching services, we generate service fees from freight brokerage models, membership fees from listing models, and commissions from online transaction services. Revenues from freight brokerage service were RMB $689.2 million in the third quarter, a 79.1% increase from RMB 384.8 million in the same period last year. This increase was primarily driven by significant growth in transaction volume, but partially offset by a decrease in average fee rate to attract more shippers to our service. Revenues from freight listing service in the third quarter this year were RMB 213.7 million. up 49.6% from RMB 142.9 million a year ago, primarily attributable to an increase in total paying members amid increased shipper demands for our services as our business continued to expand. Revenue from transaction commission amounted to RMB 182.2 million in the third quarter, an increase of 22 times from RMB 7.9 million in the same period last year, primarily driven by a rapid run-up of commissioned GTB penetration. Our revenues from value-added services in the third quarter were RMB 156.5 million as compared with RMB 199.4 million in the same period last year. The decrease was mainly attributable to reduction of revenue recorded as a result of our strategic customer incentive plans in connection with new monetization initiatives. Our cost of revenues in the third quarter was RMB 842.1 million, compared with RMB 349.7 million in the same period last year. The increase was primarily attributable to an increase of FAT, related tax, surcharges, and other tax costs. net of tax refund from government authorities. These tax-related costs and refunds totaled RMB $768.9 million, representing an increase of 161.3% from RMB $294.2 million in the same period last year, primarily due to an increase in transaction activities, including involving our freight brokerage service. Sales and marketing expenses in the third quarter were RMB 190.6 million compared with RMB 139.3 million in the same period last year. The increase was primarily attributable to higher salaries and benefits expenses driven by an increase in sales and marketing headcount and increased advertising and marketing expenses to promote new initiatives, partially offset by a decrease in share-based compensation expenses. G&A expenses in the third quarter were RMB 190 million compared with RMB 442.6 million in the same period last year. The decrease was primarily due to a decrease in share-based compensation expenses and a decrease in compensation costs resulting from the repurchase of ordinary shares in excess of fair value, partially offset by compensation costs incurred in relation to continuing service terms in business acquisitions. R&D expenses in the third quarter were RMB 202.9 million compared with the RMB 115.8 million in the same period last year. The increase was primarily due to an escalation in salary and benefit expenses driven by higher headcounts in R&D personnel, partially offset by a decrease in share-based compensation expenses. Our loss from operations in the third quarter was RMB 201.7 million compared with RMB 341.6 million in the same period last year. Net loss in the third quarter of 2021 was RMB 178.3 million compared with RMB 334.3 million in the prior year period. Under non-GAAP measures, our adjusted operating loss in the third quarter was RMB 81.1 million compared with adjusted operating income of RMB 141.1 million in the same period last year. Our adjusted net loss in the third quarter this year was RMB 4.7 million compared with adjusted net income of RMB 145.8 million in the same period last year. Basic and diluted net loss per ADS were RMB 0.17 in the third quarter compared with RMB 1.97 in the same period last year. Non-GAAP adjusted basic and diluted net loss per ADS were RMB 0.0 in the third quarter of this year compared with non-GAAP adjusted basic net income per ADS of RMB 0.86. and non-GAAP adjusted diluted net income per ADS of RMB 0.23 in the same period last year. As of September 30th, 2021, the company had cash and cash equivalent, restricted cash and short-term investments of RMB 26.9 billion in total compared with RMB 18.9 billion as of December last year. But the third quarter of 2021, Net cash used in operating activities was RMB 78 million. We believe our sound financial conditions and strong cash position will support our strategic initiatives, strengthen our competitive edge, and allow us to explore new opportunities for future growth. Looking at our business outlook for the fourth quarter this year, we expect our total revenues to be between RMB 1.24 billion and RMB 1.31 billion, representing a year-over-year growth rate of approximately 46% to 54%. These forecasts reflect our current and preliminary view of the market and operational conditions, as well as the impact of the pending cybersecurity review, recurring COVID-related disruptions, extreme weather conditions, and production constraints brought by electricity electricity shortage in parts of China, which are subject to change and cannot be predicted with reasonable accuracy as of the date here. Our solid third quarter results reflect FTA's leadership in China's fast-growing road transportation industry, where we continue to capitalize on our core strengths in technology and grow on all fronts. To extend this positive momentum, we will remain dedicated to our logistics network expansion, technology innovation, and infrastructure development, empowering our users while improving our monetization capabilities prudently and creating long-term value for our shareholders. That concludes our prepared remarks. We will now like to open the call to Q&A. Operator, please go ahead.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. Our first question comes from Charlie Chen with China Renaissance. Please go ahead.

谢谢管理层,各位管理层好。 谢谢用时间来回答我的问题。 我这边有两个问题。 第一个问题是我们看到三季度整个平台的旅游的GTV uh, uh, Thanks, management, for taking my questions. I have two questions here. The first one is regarding the fulfilled GTV. We can see you have achieved a very strong year-on-year growth, but on a quarter-on-quarter basis, it slightly declined in the third quarter. So can you share with us what is the rationale and driver behind it, And what is the momentum or trend in the fourth quarter? And my second question is regarding the users. So we would like to know what is the user composition as well as the user activeness in the third quarter. Is there any major changes compared to previous quarters? Thank you very much.

Yes, let me answer that. The main driving factor for the growth of the three-week platform GTV is the increase in our turnover rate. This quarter, our turnover rate increased by about 10% and reached 27%. The increase in turnover rate is mainly due to the continuous understanding of the two-end data of the platform. Then, through the ability of big data and the use of algorithms, we increased the accuracy of the matching. For example, we used the user tag to recommend and assign orders, so that the needs can be further optimized. At the same time, through the excellent service capability of the platform, we launched new products such as one-off and commissioning products, as well as wider user protection measures on the cover, which better satisfies the needs of both sides of the user. In addition, with the continuous optimization of the platform user structure, we have seen that the ratio of customers to customers

So regarding the first question on the GTV trend, we believe the year-over-year growth in GTV this quarter was primarily attributable to an increase in fulfillment rate, which rose nearly 10 percentage points to approximately 27%. We increased our fulfillment rate through a deeper understanding of both supply and demand, our big data capabilities, and the application of algos to refine matching accuracy. For example, we further optimized demand matching with our user labeling system and designated order model. Meanwhile, by improving the platform's one-stop service capabilities, we also continued to roll out innovative products and user safeguard measures, along with broader coverage to better meet users' diverse needs of both user groups. We have also seen a notable year-over-year bias in the proportion of direct shippers due to optimization of our user structure, which further enhanced our fulfillment rate.

We received mainly a delay in new users' registration in the third quarter. This factor has a certain impact on us. In addition, the recurrence of the epidemic in many places, including some extreme weather, has led to the presence of more and less in some areas, and the situation of supply and demand is not very good. These have a certain negative impact on the 3G network and TV. Considered to be affected by the continuous impact of various factors such as interlocking, pulling, recurrence of the epidemic, limited power, limited production, etc., the external environment of the 4G network still has a certain uncertainty. But we think that these short-term external factors In the third quarter, we have experienced a suspension of user registration, recurring COVID disruptions, and extreme weather conditions, which all led to tracker shortage in some regions and impacted our GTV growth during the quarter.

These ongoing factors combined with the recent production constraints due to electricity shortage also contribute to the uncertainty in the external environment in the coming quarter. However, we do not believe that these short-term fluctuations will materially impact our long-term goals. We are confident that our ongoing efforts to improve user experience and enhance our closed-loop model will result in stronger network effects.

Um. Um. Regarding the second question on user trend, there was no significant change in terms of user competition or user behavior.

The shippers and truckers' overall activity remained steady, and average shipper MAU reached 1.61 million in the quarter. Our platform users are also highly sticky. As of the end of this quarter, the 12-month retention rate for our paying shippers remained stable at around 85%, the same level as last quarter.

We expect that in the future, especially after new users register and recover, the proportion of direct customers will continue to rise steadily. The reasons behind the changes in the characteristics of these users and the structure of users just mentioned are mainly because the network effect of the platform is constantly improving. The data algorithm continues to improve, making the efficiency of the platform increase. At the same time, our users experience continuous optimization, making the dependence on the platform of users getting higher and higher.

Turning to our user competition, the proportion of direct shippers on our platform remains stable in the quarter. We expect this ratio to increase steadily as we move forward, especially after new user registration resumes. As we strengthen our powerful network effects, cutting-edge data capabilities, and intelligent algos, we also enhance matching efficiency and user experience, thereby increasing the shippers' reliance on our platform.

Thank you.

Our next question comes from Ryan Gong with Citi. Please go ahead.

Good evening, everyone. Thank you for accepting my question. First of all, congratulations on your very good performance. My question is that I don't know if the management can share with me the specific progress of the three-week withdrawal, including the latest situation of the withdrawal penetration rate and the withdrawal rate, and what is the latest plan for the further development of our future withdrawal plan? Can management share us an update on the progress of commissions in the third quarter, including the penetration and the commission rate, and what is your rollout plan going forward? Thank you.

Thank you. This is Simon Tsai from SBA. Let me address this question in English directly. We collected commissions totaling RMB 182 million in the third quarter, most of which were attributable to our extended commission penetration. As of the end of September, we collected commissions in 95 cities. The overall commission rate in the quarter remained largely stable versus second quarter. And data and user feedback from those 95 cities covered by our commission model indicates that user activity remained high during the quarter. And specifically truckers, next month's retention rate reached approximately 90% in these regions. Our commission strategy includes diverse commissioning methods tailored to the characteristics of different businesses and regions. The current data indicates that truckers in the commission regions have a relatively high acceptance level for paying commissions as they have already cultivated the habit of paying commissions. In the first quarter, we plan to steadily improve the commission rate while further enhancing our commission penetration. We remain committed to providing additional value-added services for our truckers and improving product functions and user experience while expanding our commission model.

Okay, thank you.

Our next question comes from Xin Yang with CICC. Please go ahead.

Can you hear me? Yes.

Okay.

First of all, congratulations. The third quarter has achieved good performance. I have two questions. I would like to ask President Zhang and President Sun. The first question is that the income growth of our third quarter is about 68.9%, but the cost has increased by 140.8%. We can see that in the explanation, it may be mainly related to our So we saw that the revenue of the third quarter actually increased by 68.9% year-over-year, but the cost actually increased by 140%. So What is the reason behind it? And will this trend continue into the fourth quarter? So on November 14th, Cybersecurity Review Office actually launched the measures for data security management. It's a draft. So will the measures have any impact to the company, and how? OK, .

Sure, thank you. Regarding your first question, the increase of cost of revenue in the third quarter was primarily attributable to an increase in VAT and also related tax surcharges and other costs, net of tax refunds from governments, which was mainly driven by an increase in transaction activities of our freight brokerage business. In addition, our labor costs and operational expenses also increased due to business extension. The reason why cost of revenue grew faster than our revenue this quarter was primarily due to the timing difference between tax refund recognition and revenue recognition. If we exclude revenue from the freight brokerage business, as well as related the tax costs associated with this business. The adjusted contribution margin of other businesses grew to 81 percent from roughly 78 percent in the prior year period. Going forward, we expect the absolute value of cost of revenues will continue to increase as we extend our business. However, those costs as a percentage of revenue are expected to decrease gradually as we improve our operational efficiency and have a large revenue contribution from transaction commissions. To address your second question, we understand the recently launched draft measures for data security management is the refined version of data security law and cybersecurity law with multiple newly added rules. With respect to companies that are listed overseas, the measures require that corporations should submit a data security assessment to the cybersecurity review office on an annual basis, in addition to the pre-IPO review. In addition, the measures detail more refined compliance requirements in relation to corporate operations. Although the measures are still in the draft stage of comments, for comments, we will closely monitor development. We'll prepare to fulfill all relevant requirements.

Okay, thank you. Thank you so much.

And that does conclude the question and answer session. I would like to turn the conference back over to management for any additional or closing comments.

Okay. Thank you once again for joining us today. If you have any further questions, please feel free to contact us at FTA directly or TPG Investor Relations. Our contact information for IR in both China and the US can be found on today's press release. Have a great day.

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