Full Truck Alliance Co. Ltd.

Ladies and gentlemen, good day and welcome to Full Truck Alliance's second quarter 2022 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, operator. Please note that today's discussion will contain four working 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 these following statements, 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's signature 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 FTA's investor relations website at ir.photogalliance.com. I will now turn the call over to our founder, chairman, and CEO, Mr. Zhang. Please go ahead, sir.

Hello, everyone. Thank you for joining us today on our second quarter of 2022 earnings conference call. Before today's press conference, I would like to inform you about the progress of the network security audit. As you all know, last July, NetSense launched a network security audit on our app. Over the past year, we have been actively cooperating with the monitoring department to check and correct the problems found in the audit. Although the audit results We believe that a perfect data and network security monitoring system will benefit the long-term health development of the industry.

Before I go into our second quarter performance, I would like to first provide an update on the cybersecurity review. As most of you are aware, the Cybersecurity Review Office of the Cybersecurity Administration of China initiated a data security investigation of our Umama and Hortifon apps in July last year to detect any potential data security risks. Throughout the review process, we have fully cooperated with the CRO and taken comprehensive measures to address the issues identified. Although the results of the review have not been officially released, we are pleased to report that the review has made significant progress as both our Imaman and Ho Chi Bong apps have resumed new user registration as of June 29 this year. Going forward, we will continue to work closely with the CRO to comply with all the regulatory requirements relating to cybersecurity, data security, and protection of personal information. Furthermore, we remain committed to facilitating the establishment of our platform's data protection guidelines and optimization of our cybersecurity system by continuously implementing effective measures. We firmly believe that an optimized regulatory environment is both necessary and beneficial for the long-term healthy development of the industry.

Although the end of the second quarter, most of the domestic regions are gradually resuming production, but the epidemic, this gradual epidemic still exists. In the second half of the year, there are still more uncertain factors in the supply chain logistics. Under the huge industry challenge, the second quarter, our platform's travel GTV reached 65.8 billion yuan, which is 22.8% higher than the first quarter. Now moving on to our second quarter earnings results. The second quarter of 2022 was a challenging one for FTA and the entire logistics industry.

The resurgence of COVID-19 in April led to widespread restrictions in major Chinese cities, further slowing the growth of the overall freight volumes in the logistics industry in the second quarter. While most parts of China have gradually resumed work and production since the end of the second quarter, with sporadic pandemic recoveries continuing to emerge, it is clear that we will still face many external uncertainties in the road transportation industry during the second half of the year. Against this market backdrop, our GTV and the number of fulfilled orders increased by 22.8% and 10.7% quarter-over-quarter to RMB $65.8 billion and $27.8 million, respectively. Average shipper MAU remained at $1.53 million in the second quarter, up 7.7% quarter-over-quarter and flat year-over-year.

In terms of financial performance, the total revenue of the second quarter platform reached RMB 16.7 billion, which increased by 49.3% in the same ratio and increased by 25.3% in the same ratio, which once again exceeded the highest value of our guide. Under the guidance of dual-engine driving, which increases the ability to shift and improve operating efficiency, the net profit after the second quarter adjustment increased by 1.7 times, reaching RMB 2.67 billion.

In terms of financial performance, our total net revenues continued to grow in the second quarter by 49.3% year-over-year and 25.3% quarter-over-quarter to RMB 1.67 billion, once again beating the high end of our revenue guidance. More importantly, as we intensified our focus on monetization enhancement and operational efficiency improvement, Our non-GAAP adjusted net income increased by 168.1% year-over-year to RMB 266.9 million in the second quarter.

Although the external environment in the second half of the year is still full of challenges and uncertainties, our long-term vision and strategic direction for platform development is still very firm. In the future, we will continue to strive to create a smart, low-cost digital supply platform that fully plays a leading role in the industry. market turbulence in the second half of the year notwithstanding our long-term vision and the strategic direction for development remain firm as we progress through 2022 we remain committed to making fta a smart and

low-carbon logistics service provider, driving the transformation of the industry and realizing the social value of our platform by leveraging and amplifying our industry-leading strengths in user experience and protection, green operations, and digital innovation, among others. We believe that the resumption of new user registration for our core apps and our strong cash position will support us as we navigate the complex market dynamics.

With that, I will now turn the call over to our state phone, Simon.

He will go over our operational and financial results in more detail.

Thank you, Mr. Zhang, and hello, everyone. I will go through the overall performance of our company in more detail. As Mr. Zhang stated before, We delivered solid financial and operational results in the second quarter, with the challenges stemming from COVID-related restrictions as well as continued suspension of new user registration. Although GTV decreased significantly in Shanghai due to the pandemic, factories in other regions were able to handle some of Shanghai's shipping demands. However, Adversely impacted by disrupted network operations and lockdown-related truck shortages in certain areas of China, our average fulfillment rate declined to 20.5% in the quarter. Now that our core apps have resumed new user registration, we have started to see signs of fulfillment rate recovery in July, and we expect the overall fulfillment rate in the second half of the year to further improve. In addition, the median freight matching time in June was approximately 11 minutes, consistently shorter than in the same period last year and the first quarter, again demonstrating the continued improvement in our platform's algo-driven matching efficiency while simultaneously resulting in increased order matching accuracy. For example, before our recommended order function was launched, Truckers used to spend on average of five minutes searching for shipping orders by themselves. Now relying on recommended orders, they need just three minutes to identify appropriate shipments and complete transactions. This iterative upgrading and accurate push of our algo in the second quarter has saved time for truckers and greatly improved matching efficiency. Moving on to our users. the retention rate of our shippers and truckers remained stable quarter over quarter. In the absence of new user registration, second quarter growth in our shipper mile mainly came from the increased contribution of our direct shippers. Furthermore, in the second quarter, largely due to member conversion, the number of our entry level, or 688 member miles, which includes a large group of direct shippers increased by over 40% year-over-year and exceeded that of our second tier or 1688 member miles for the first time. Such outstanding growth in the absence of new user, new member registration again highlight the core shippers recognition of the value of our platform. new user registration has resumed. We expect continued growth in the size of both of our 688 membership and non-member cohorts. Speaking of which, we are excited to see rapid growth in the number of newly registered users since the end of the second quarter Up to now, we have successfully converted about 300,000 new monthly active shippers and nearly 300,000 new monthly active truckers responding to orders. Following the resumption of new user recruitment, we launched a series of online and offline user acquisition initiatives and comprehensively refined our user operation process. including increasing platform exposure through multiple corporation channels, promoting the conversion of new users into registered users through precise targeting and recommendation, and helping new users successfully complete their first transaction. We have also developed customized marketing strategies for direct shippers and potential paying members. Looking forward to the second half of the year, we remain focused on providing more valuable products and services, optimizing user experience on both ends, and improving engagement level and stickiness of new and existing users, so as to achieve continuous growth of user scale and transaction volume on a platform. Turning now to our business details, our online transaction service continues to perform strongly, with revenue increasing by 116 year-over-year to RMB 347.8 million in the second quarter. The increase was primarily driven by higher commission penetration year-over-year. Given the pandemic's recurrence in the second quarter, we chose not to expand our commission model to additional cities, but instead implemented a dynamic commission adjustment strategy based on fulfillment time and freight price. Thanks to this inventive approach, our commissioned GTV penetration reached 50% despite the pandemic's impact. Furthermore, both user activity and volume levels in commissioned regions remain stable. Among them, the next month's retention of commissioned truckers in 195 cities is above 85%, and the next month's retention of our first batch of commissioned truckers in Jiangsu and Zhejiang provinces and in Shanghai City is over 90%. Commission revenues accounted for more than 20% of our overall revenue in the second quarter, and our commission model's contribution to the monetization of our platform continue to grow. For us, the nature and success of the commission model hinge on how much value is created for users. In the future, while continuously improving the take rate and commission penetration, We will also continue to upgrade product functions and refine our platform's matching efficiency to help shippers deliver goods faster and more conveniently and also support a wider range of truckers to obtain more orders and profits. To that end, user centricity remains our top priority. In the second quarter, each business unit of our platform established a user experience department focusing on the comprehensive optimization of our product usage process to bring an even better experience to our users. Given our growing investment in user experience enhancement, we expect our user complaint rate to continue to decline. Furthermore, the shipper rating system we launched at the beginning of this year to improve truckers' experience now covers seven provinces and cities. Our truckers have broadly commended the system and it has spurred positive changes to the shipper side as well. For example, shippers with better rating tend to enjoy comparably higher frequency of page visit and fulfillment rate. We're confident that the shipper rating system will help our most credible shippers find truckers more efficiently. Benefiting from those improvements to our platform ecosystem, Both 12-month retention of shippers and next-month retention of truckers who responded to shipping orders on our platform remained high at approximately 85% in the second quarter. Finally, in response to truckers' complaints about low freight rates, in the second quarter, our operation team instituted various reminders and feedback functions for shippers and truckers at each stage of the shipment bidding process, to encourage shippers to make more reasonable bids and improve the overall health and fairness in the pricing. For example, shipments with unreasonable ultra-low bids are blocked early in the process. We also inform shippers about appropriate pricing and issue markup guidance before allowing them to place low-priced bids to help cultivate fairer bidding habits and increase shipping price. At the same time, we wrote out a dedicated communication channel for truckers to give direct feedback on low-priced goods or to request price increase on unreasonably priced shipments. Together, these measures have effectively improved our platform's overall freight rate, fulfillment rate, and trucker satisfaction. Before moving on to discuss our financial performance, I'd like to highlight our commitment to fulfilling our responsibility to our industry, environment, and society, which is at the core of our ongoing success. Since our inception, we have worked to advance a wide range of ESG initiatives within the stakeholder communities we serve. In early July, we unveiled our 2019-2021 Corporate Social Responsibility Report, the first such report issued across China's entire digital transportation industry. In it, we showcase our exploration and achievement in fulfilling our social responsibilities in recent years, focusing on our platform strategy, scientific and technological innovation, credit system construction, public welfare development, and green operation. We strive to positively impact our users employees, and the communities in which we live, and we believe that creating and meeting long-term ESG goals will ultimately fuel our sustainable development. Now I'd like to provide a brief overview of our second quarter financial results. Our total revenues in the second quarter were RMB $1.7 billion, representing an increase of 49.3% year-over-year, primarily attributable to an increase in revenue from freight matching services. Revenues from freight matching services, including service fees from freight brokerage models, membership fees from listing models, and commissions from online transaction services were RMB $1.4 billion in the second quarter, representing an increase of 50.3% year-over-year, primarily attributable to an increase in revenue from our freight brokerage service, as well as rapid growth in transaction commissions. Revenues from freight brokerage service in the second quarter were RMB 850.2 million, representing an increase of 41.4% year-over-year, primarily driven by significant growth in transaction volume as a result of improved user penetration. Revenues from freight listing services in the second quarter were RMB 211.7 million, up 20.7% year-over-year, primarily attributable to an increase in total paying members. Revenues from transaction commissions amounted to RMB $347.8 million in the second quarter, an increase of 116.2% year-on-year, primarily driven by continued ramp-up of commission GTV penetration and partially offset by a decrease in GTV due to the COVID outbreaks. Revenue from value-added services in the second quarter was RMB 260.4 million, an increase of 43.7% year-over-year, primarily attributable to increased revenue from credit solutions. Cost of revenues in the second quarter was RMB 925.9 million, compared with RMB 627.0 million in the same period last year. The increase was primarily attributable to an increase in VAT-related tax surcharges and other tax causes and net-off tax refunds from government authorities. These tax-related causes net-off refunds totaled RMB $845.4 million, representing an increase of 47.7% from RMB $572.4 million in the same period last year. primarily due to an increase in transaction activities involving our freight brokerage service. Sales and marketing expenses in the second quarter were RMB 196.2 million compared with RMB 236.8 million in the same period last year. The decrease was primarily due to a decrease in advertising and marketing expenses during the user registration suspension period partially offset by an increase in salary and benefits expenses driven by higher sales and marketing headcount. G&A expenses in the second quarter were $344.8 million compared with RMB $2,123,000,000 in the same period in last year. The decrease was primarily due to lower share-based compensation expenses. R&D expenses in the second quarter were were RMB 216.4 million compared with RMB 165.1 million in the same period of 2021. The increase was primarily due to an increase in salary and benefits expenses driven by higher R&D headcount. Loss from operations in the second quarter was RMB 46.4 million compared with RMB 2.0 billion in the same period last year. Net income in the second quarter was RMB 12.7 million compared with net loss of RMB 2 billion in the same period last year. Under non-GAAP measures, our adjusted operating income in the second quarter was RMB 211.3 million, an increase of 949.9% from RMB 20.1 million in the same period last year. Our adjusted net income in the second quarter was RMB 266.9 million, an increase of 168.1% from RMB 99.5 million in the same period last year. Basic and diluted net income per ADS were RMB 0.01 in the second quarter compared with basic and diluted net loss per ADS of RMB 7.34 in the same period last year. Non-GAAP adjusted basic and diluted net income per ADS were RMB 0.25 in the second quarter compared with non-GAAP adjusted basic and diluted net loss per ADS of RMB 0.49 in the same period last year. As of June this year, the company has cash and cash equivalent restricted cash and short-term investments of RMB 26.1 billion in total, compared with RMB 26.0 billion as of December last year. For the second quarter of 2022, net cash used in operating activities or RMB 286.4 million. Looking at our business outlook for the third quarter of 2022, we expect our total revenues to be between RMB 1.65 billion and RMB 1.73 billion, representing a year-over-year growth of approximately 32.9% to 39.2%. These forecasts reflect the company's current and preliminary views on the market and operational conditions. The COVID outbreaks are associated with substantial uncertainties, including the geographic scope and duration of the outbreaks, the additional restrictive measures that the government authorities may take, and the further impact on the business of shippers, truckers, and other ecosystem participants. all of which are subject to change and cannot be predicted with reasonable accuracy as of the date hereof. By further unleashing the synergies of our platform's efficiency and the strengths of our nationwide road logistics network, we continue to spur growth momentum across our business units. Going forward, We remain focused on offering better products and services for our growing user base to help retain existing shippers and engage new users while ensuring quality growth. As the road transportation industry recovers, we look forward to capitalizing on even more promising growth prospects to reinforce FTA's leading position and amplify the value we bring to all of our stakeholders. 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question from the queue, 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 Brian Gong with Citi. Please go ahead.

Thank you for accepting my question. Congratulations to Citi for achieving a very good performance in such a difficult situation. I will translate myself. Thanks, Benjamin, for taking my questions. Congratulations on solid second quarter results. We have seen that the company announced other commission rules and the cap on commission rates at the end of June. Can management share how will this have any impact on commission plans in the future? Thank you.

What we do a lot is to clarify the rules and regulations to help the clients understand the entire process. And the company has fully considered the overall development plan of the company. It will not have an impact on the future of the project. From the business itself, the current sales proportion of the platform is very low in the industry. But we have seen the value of the dual-end matching service. And continue to promote the development of the industry in terms of digitalization, standardization and systemization.

We announced that the Commission's role was mainly to increase our pricing mechanism's transparency and help truckers understand the whole operating process. The publicized Commission rules have already taken into account the company's long-term business plan and future take-rate ramp-ups. so we don't think this announcement will affect the progress of our monetization. From business perspective, our tick rate is the lowest across industry peers, while the value we brought with our matching services between shippers and truckers is obvious. Looking forward, we will continue to promote a digitalized, standardized, and intelligent transportation industry. As we further grow our business skill and optimize our product functions, we will also remain committed to providing more value to our truckers. Next question, please.

Our next question comes from Ronald Kim with Goldman Sachs. Please go ahead.

Thank you, Mr. Zhang, Ms. Zhang, and Mr. Wang. I would like to ask, The price has risen to around $2,300-$2,400. Compared to last year, it increased by about 15%. Q1Q has raised 10% of the cloud price. What do you think of the changes in the cloud price? What are the main reasons? And how should we judge the future trend? Now, finally, we've seen that the average freight rate, QTB versus orders, divided by orders, in the second quarter was nearly 2,400 RMB. So it was a 15% Yoni increase, 10% Q1Q. So what are the main reasons for that, and how should we see the trend going forward? Thank you.

Thanks, Ronald. This is Simon Tsai here. I want to address your question. So first of all, in the second quarter, we see an increase in the freight rate on the platform. And this is mainly due to lockdown-related trucker shortages in many parts of China, which led to a rapid freight rate increase in a short period of time. And secondly, high oil prices in the first half of this year also contributed to the rise in the freight rate. Generally speaking, the impact of oil prices on freight rates materializes slowly over time with a certain lack effect. So it is difficult to quantify the direct result of oil price changes on the freight rate in the short term. With the easing of COVID outbreaks and the resumption of new user registration on our core apps, we see that the past imbalance between supply and demand has gradually begun to equalize. So as we progress through the second half of the year, we expect the freight rate to slowly trend downward.

Thank you, Simon.

Our next question comes from Charlie Chen with China Renaissance. Please go ahead.

谢谢管理层给我这个机会提问。 那我有一个问题就是在二季度有这样一个疫情等外部环境的影响下, 公司的这个用户结构和用户活跃度以及GTV和订单构成的这个组成有没有一些明显的变化? 那我翻译一下。 What are the changes in user composition and the user activity, as well as GTV and order composition in second quarter amid the COVID-19 resurgence and the weak macro conditions? Thank you.

Thank you. Overall, we think the GTV contribution of direct shippers in the second quarter remains stable on a quarterly basis. While the suspension of new user registrations still adversely impact our business in the quarter, the continuous optimization of user experience has actively encouraged the non-membershipers to upgrade to the membership program. This drives an increase in the number of existing members. Most of these non-membershipers upgrade to our 688 membership level. which is predominantly comprised of direct shippers. Such a strong growth in the absence of new member registration again highlights our shippers' high dependence on the platform and represents a concrete step forward towards our long-term goal of optimizing our platform's user ecosystem. In terms of user behavior, Our users continue to exhibit significant stickiness. For the last four quarters, the rolling 12-month retention rate of our paying shippers and the next month retention rate of truckers who responded to orders both stayed at around 85%, unaffected by the new user registration suspension. Moreover, in the second quarter, we continued implementing effective operational strategies such as increasing existing users' transaction frequency through targeted marketing campaigns and improve our shipper rating system, which partially offset the negative impact of the COVID outbreaks. With respect to order composition, due to the COVID effects in the second quarter, the freight rate fluctuated substantially. More users tended to undertake price negotiation rather than relying on of the TAP and GO model. As a result, the GTV and other contribution of the negotiated model increased slightly during the period. However, as the outbreak abates, we expect the GTV and other contribution from our TAP and GO model to recover gradually. As we move forward with the resumption of new registration, the market recovery and the continued conversion of direct shippers. We expect direct shippers' GTV and other contributions to maintain a steady increase.

Thank you very much.

Our next question comes from Julie Lee with CICC.

Please go ahead. The growth margin in the second quarter is 44.6%, slightly lower than in the first quarter. So what are the main reasons for the quarter-over-quarter decrease? How should we expect the gross margin to change in future?

Sure. The slight quarter-over-quarter decrease in gross margin was mainly attributable to the fluctuation of gross margin in the freight brokerage business with the timing difference of government refunds. If we exclude this segment, our approximate gross margin for other businesses improved both year over year and quarter over quarter. Looking forward, we expect transaction commission to be the key driver of our future revenue growth and profitability improvement. As we continuously scale up our commission model and optimize operational efficiency, we expect our gross margin to improve further.

Our next question comes from IVG with Credit Suisse. Please go ahead.

晚上好,管理层。 感谢,这是我的提问。 我有一个关于这个费用端的问题。 阿基督我们看到我们那个费用控制其实是非常好的, 特别是这个South Marketing同比是下降17%, 然后就想问一下我们主要的这个原因是什么, 然后在下半年的话应该怎么去想这个往后的一个趋势。 Thanks, management, for taking my question. I have a question about our OPEX trend. So in the second quarter, we have seen very disciplined OPEX spending, especially for sales marketing, which fell by 17% year-over-year. So I just wanted to understand what's the key reason for this change, and how should we think about the OPEX and sales marketing trend into the second half? Thank you.

Thank you. Our sales and marketing expenses mainly consist of salary and benefits related to sales and marketing personnel as well as marketing and promotion expenses. The year-over-year decrease in sales and marketing expenses in the second quarter was primarily due to a reduction in the advertising and promotion expenses during a period of new user registration suspension. Going forward, we expect sales and marketing expenses to increase in absolute dollar amount as new user registration resumes and our new businesses continue to expand. At the same time, we also expect sales and marketing expenses as a percentage of total net revenues to decline over time as we maintain revenue growth and improve operating leverage.

Thank you.

Our next question comes from Tian Hao with TH Capital. Please go ahead.

Yeah, morning, management. I just have one question. So there are a lot of discussion about, you know, Chinese authority and SEC's dialogue regarding the auditing paper, you know, working paper. So at this point, we know we haven't reached agreement about making progress. Just wonder what is your view on the potential delisting risk if the two governments cannot reach agreement for the PCAOB to inspect the working paper on particular company? Thank you.

Thank you. There are lots of rumors on the market today. We're also monitoring the situation very closely and we're considering different options including the possibility of a due primary listing in Hong Kong. We have finished the preliminary assessment and do not foresee any major technical issues for us to listing Hong Kong. Meanwhile, we are also working closely with our auditor and regulators on this issue. on this PCAOB issue. At the moment, everything is still in progress. If there are any further updates, we will inform the market in accordance with all disclosure requirements.

Okay, thank you.

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

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at 4TRAC Alliance directly or GPG Investor Relations. Our contact information for IR in both China and U.S. can be found in today's press release. Have a great day.

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