Full Truck Alliance Co. Ltd.

Ladies and gentlemen, good day and welcome to Full Truck Alliance's third quarter 2023 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 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 findings 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 Please see the earnings release issued earlier today. Joining us today on the call from FDA's 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 FDA's investor relations website at ir.fulltruckalliance.com. I will now turn the call over to our founder, chairman, and CEO, Mr. Zhang. Please go ahead, sir.

This decade is the decade of digital transformation of China's public logistics and logistics. We continue to polish products and services through live digitalization and digitalization. We have gained a wide range of customers and drivers' trust. We have now covered more than 300 cities across the country from 0 to 10 to 10 lines, tens of millions of shipments and harvest areas. More than 200 industrial products and consumer goods industries have formed a solid national cargo network effect and mutual support. Hello, everyone. Thank you for joining us today on our third quarter 2023 earnings conference call. Entering the second half of 2023, the Yunmaman app has ushered in the 10th anniversary of its launch.

This decade has witnessed the digital transformation of China's road transportation industry, and as a leader in the industry, we have continuously improved our products and services through offline to online migration, digitalization, and intelligentization, gaining trust among our shippers and truckers. We started from scratch and now cover over 300 cities across the country with more than 100,000 shipping routes, tens of millions of shipping and receiving locations, and over 200 types of cargo from industrial and consumer categories. This has gradually formed a robust nationwide network effect and a highly competitive mode. Centered around our core user value proposition of plentiful, fast, quality, and value for money, we will strive to empower enterprises with greater logistics competitiveness through the building of a one-stop logistics platform for 30 million small and medium-sized enterprises in China.

688 and non-contractor contract orders have increased by 32% and reached a total of 45%. In terms of product operation, the high-end products suitable for direct customers help new users to solve problems in shipping and travel through real-time cross-referencing and differentiated contract services. It effectively promotes the growth of new users. The business version suitable for professional logistics and logistics is also in steady promotion. In terms of transport supply, we have further strengthened the mechanized management of driver-division supply. Increase driver skills, improve transport security, promote driver scale growth and increase driver portfolio scope. Firmly supply and match the optimization of the strategy. Drive transaction efficiency is significantly increased. No need to transfer, directly grab orders to get faster growth. In the past one-off service, we have increased the penetration rate of real estate, financial insurance, and other real estate business, and increased the value of the chain, bringing better one-off service to the private and double-end users. In addition to the investment and delivery of product functions, we are also very active in the user experience. In this period, we have upgraded the customer service center to 24 hours a day, 365 days a day, to meet the needs of users at any time. At the same time, we have simplified the process of introducing artificial customer service, and improved the special label and detection device for private transaction. This is to solve the core problem of private transaction, and enhance the satisfaction of users.

Let me provide an update on our progress in the third quarter. During the quarter, we have steadily improved in five key areas, user skill, product operations, supply of truckers, platform ecosystem, and user experience. First, regarding user skill, we have reached 2.13 million monthly active shippers, a 15% year-over-year increase, which drove a 27% year-over-year increase in the number of fulfilled orders. Notably, the scale of direct shippers continue to increase with order volume from 688 members and non-member shippers growing by 32% year-over-year and accounting for 45% of total order volume. Turning to product operation, our entrusted shipment model, a niche product for direct shippers, has effectively attracted new users by addressing their needs through refined pricing algos and improved fulfillment services. We are also working on the launch of an enterprise edition targeting professional shippers. Moving on to the trucker supply, we have further enhanced our tiered trucker rating system, enabling truckers to improve their fulfillment capability and strengthen transportation support, eventually leading to an expanded trucker supply and ownership gain. Adequate transportation capacity supply and optimized matching strategies have significantly enhanced fulfillment efficiency. For instance, the pre-price transaction allowed truckers to respond directly to order posting without price negotiation, and the order volume for pre-price transactions, including tap and go and entrusted shipments, continued to grow faster than the overall order volume in the third quarter. Looking at our platform ecosystem, with goal of establishing a one-stop logistics platform we have witnessed an increased user penetration of our value added services, such as insurance and credit solutions, as well as free brokerage services, which in turn contributed to a higher user thickness for both shippers and trucker members. Lastly, in addition to product functionality upgrades, we highly value the user experience. This quarter, we upgraded our customer service center to provide 24-7 services, promptly addressing user queries. Through simplified user access, we have streamlined the process of collecting user feedback, providing efficient end-to-end service, genuinely helping shippers and truckers solve problems, and therefore improving user satisfaction.

The scale of the business is expanding. This quarter, our revenue and interest levels are also rising. This quarter, our revenue and interest levels are also rising. Moving on to our financial highlight, we delivered another record-setting quarter in both our top line and the bottom line.

driven by our further expanded business food points. Our third quarter revenues grew by 25.2% year-over-year to RMB 2.26 billion, and the non-GAAP adjusted net income reached RMB 827 million of 67.6% year-over-year, both surpassing market expectations. As we expand our revenue scale going forward, we will continue to optimize our revenue mix and elevate monetization efficiency creating more value for our shareholders.

The country has launched a series of policies that support the development of the private sector economy. In the process of strengthening and strengthening the industrial chain, Wulou has also gained more and more important status and political support as the backbone of the physical economy. We are confident in the ongoing growth of platform business units and income. We will continue to expand our investment in basic innovation and user experience. Looking ahead to the fourth quarter, the government has introduced a series of policies supporting the development of the private economy,

where logistics as a backbone of the real economy has gained increasing importance and policy support within the process of strengthening, supplementing, and extending the industry chain. With the ongoing macro tailwind, we are confident in achieving sustained growth in all the volume and revenue scale. We will continue to invest in technological innovation and user experience, dedicated to providing more efficient, intelligent, and convenient logistics solutions to create greater value for our users as we make logistics hassle-free. We are determined to drive progress across the wider industry in collaboration with our partners, fostering an open ecosystem that benefits all. Thank you, everyone. Let me pass the call over to our CFO, Simon, who will provide an update on our third quarter business progress and the financial results.

Thank you, Mr. Zhang, and thanks, everyone, for making time to join our earnings call today. I will start with our operational highlights for the third quarter of 2023 and then provide a brief overview of our financial results before the Q&A session. We delivered another record-setting quarter with many operational and financial improvements. Our fulfilled orders increased by 27% year-over-year during the third quarter. On a monthly basis, the average daily fulfilled orders from July to September showed a sustained upward trend, hitting historical highs almost each month. The main drivers of this growth were the ongoing expansion of user scale and do end users increased engagement. Our ability to continuously deliver both top line growth and margin expansion in the past three years in a highly volatile macro environment demonstrates an irreversible trend of online digitalization of the road transportation industry in China. Our average fulfillment rate for the quarter reached 29%, an improvement of more than 4 percentage points year-over-year. Among them, the average quarterly fulfillment rate of both 688 member and non-member shippers rose to roughly 50%, respectively. With the order contribution from these two types of low and medium frequency shippers continue to grow, the overall fulfillment rate of our platform will further increase. Furthermore, we continue to manage and educate users on their order cancellation behavior. For example, as of the third quarter, the trucker's status can be identified based on data collected from trucker punch-ins and trajectories. When a shipper tries to cancel an order that was dispatched, a reminder window will pop up on the app, reducing the chance of shipper cancelling the order by mistake. At the same time, we emphasize the importance of online fulfillment for shippers to accumulate credit, providing reminders when they show the tendency to transact offline and gradually cultivate their fulfillment habits. Looking ahead, we will continue to mitigate malicious order cancellations and reinforce the consciousness and behavior of closed-loop transactions for due end users through a series of incentives and control policies. By user type, the order contribution from 688 member and non-member shippers has increased alongside the number of direct shippers. reaching 45% during the quarter. More importantly, the contribution of pre-priced orders such as tap-and-go and entrusted shipment models mainly used by direct shippers has also improved, while the proportion of negotiated orders fell further this quarter. In addition, we have further streamlined the transaction process and improved the user experience. For example, for users of our entrusted shipment model, we have greatly improved their shipping and fulfillment experience by creating real-time order trajectory visuals, which in turn is driving the rapid order growth for that service segment. We believe that the order contribution from direct shippers will further rise as we continue to optimize the accessibility of our apps. Moving on to our users, our average shipper miles another record high of 2.13 million, up 15% from the same period last year, and 6.7% from the previous quarter. The increase mainly came from the continued growth of 688 member and non-member shippers, the vast majority of which are direct shippers. During the quarter, we continued to provide more user-friendly products, and services based on our core value proposition of plentiful, fast, quality, and value for money, comprehensively tackling users' pain points and meeting various shippers' diverse freight needs to bolster our shipper penetration rate in the long haul transportation market. In parallel, we are pleased to see that trucker activities has also remained high since the third quarter, with the number of active truckers fulfilling orders through FTA over the past 12 months, climbing to 3.79 million, and the trucker user base growing steadily quarter over quarter. On top of that, our 12-month rolling retention rate of shipper members and next month's retention of truckers who responded to orders remain stable quarter over quarter, demonstrating that we continue to boost user engagement and stickiness. Lastly, our online transaction service sustained strong growth momentum in the third quarter, with revenues amounting to RMB 602.1 million, up 54.3% year-over-year, mainly due to the solid growth in the number of fulfilled orders and the increase in commissions per order. Our commission model covered approximately 58% of fulfilled orders and generated an average commission per order of RMB 24.3 during the quarter. Going forward, we'll continue to optimize the commission rate and extend our commission model coverage while providing more value-added services to our users. Before going over to this quarter's financials, I will quickly review the progress of our share repurchase program. From August 23rd to November 17th, we repurchased approximately 3.3 million ADS shares, totaling approximately $23 million. Since we announced the program, we have repurchased a total of around 22.8 million ADS shares from the open market. with a total value of approximately $147 million. Looking ahead, we'll continue to reward our shareholders through buybacks. Now, I'd like to provide a brief overview of our 2023 third quarter financial results. Our total net revenues in the third quarter were RMB $2,263.9 million, representing an increase of 25.2% year-over-year. The increase in revenue was primarily attributable to an increase in revenues 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 $1,904.4 million in the third quarter, representing an increase of 25.8% year-over-year, primarily due to an increase in revenues from freight brokerage service, as well as continued growth in transaction commissions. Revenue from freight brokerage service in the third quarter, or RMB, 1 billion and 70.2 million, up 18.4% year-over-year, primarily attributable to the continued growth in transaction volume as a result of strong user demand. Revenues from freight listing service in the third quarter were RMB $232.1 million, up 5.6% year over year, primarily due to an increased number of total paying members. Revenues from transaction commissions amounted to RMB $602.1 million in the third quarter, up 64.3% year over year, primarily driven by and increased order volume, as well as higher transaction commission per order. Revenues from value-added services in the quarter were RMB 359.5 million, up 22.1% year-over-year, mainly attributable to an increase in revenues from credit solutions and other value-added services. Our cost of revenues in the third quarter were RMB 1 billion and 142.1 million compared with RMB 953 million in the same period last year. The increase was primarily due to an increase in VAT-related tax surcharges and other tax causes, net of tax refund from government authorities. These tax-related costs, net of refunds, totaled RMB 1 billion and $32.5 million representing an increase of 19.1% year-over-year, primarily due to continued increase in transaction activities involving our freight brokerage service. Our sales and marketing expenses in third quarter were RMB $290.8 million compared with RMB $232.9 million in the same period of 2022 The increase was primarily due to an increase in advertising and marketing expenses for user acquisitions. General and administrative expenses in the third quarter were RMB 290.4 million compared with RMB 206.6 million in the same period last year. The increase was primarily due to higher share-based compensation expenses and the settlement of the U.S. Securities Class Action, which was disclosed in the Form 6-K filed on September 18, 2023. RMB expenses in third quarter were RMB $237.7 million compared with RMB $226.6 million in the same period last year. The increase was primarily due to higher share-based compensation expenses. Our income from operations in the quarter was RMB 247.5 million, an increase of 74.4% from RMB 141.7 million in the same period last year. Net income in the third quarter was RMB 618.4 million, an increase of 56.4% from RMB 395.5 million in the same period last year. Under non-GAAP measures, our adjusted operating income in the third quarter was RMB 458.5 million, an increase of 88.8% from RMB 242.8 million in the same period last year. Our adjusted net income in the third quarter was RMB 826.6 million, an increase of 67.6% from RMB 493 million in the same period last year. Basic and diluted net income per ADS were RMB 0.58 in the third quarter compared with basic and diluted net income per ADS of RMB 0.37 in the same period last year. Non-GAAP adjusted basic and diluted net income per ADS for RMB 0.78 in the third quarter compared with RMB 0.46 in the same period last year. As of September 30, 2023, the company had cash and cash equivalents, restricted cash, short-term investments, long-term time deposit, and wealth management products of RMB 27.4 billion in total, compared with RMB 26.3 billion as of December 31, 2022. In the third quarter this year, net cash provided by operating activities was RMB 717.1 million. For our business outlook for the coming quarter, in the first quarter of 2023, we expect Our total net revenues to be between RMB 2.27 billion and RMB 2.32 billion, representing a year-over-year growth rate of approximately 18.2% to 20.6%. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change and cannot be predicted with reasonable accuracy as of the date hereof. That concludes our prepared remarks. We would now like to open the call to Q&A. Operator, please go ahead.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. 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. The first question comes from Ronald Cheung with Goldman Sachs. Please go ahead.

Thank you, Chairman Zhang. Thank you, Simon. Thank you, Zhang Huizhong and Simon. In the third quarter, we've seen that the number of fulfilled orders increased quite healthily, 27% year-on-year. What were the key drivers of the growth in fulfilled order and What do you expect for the trend in the fourth quarter? Thank you.

Thank you, Ronald. In the third quarter, we witnessed sustained growth in other volumes within the full truckload model sector. And this growth can be primarily attributable to two key drivers. First, our growing shipper base, and our further optimized product features have led to an increase in usage by our existing users. This trend stems from the nationwide shift towards more efficient matching and platform-based solutions and gradually replacing traditional offline models. Users naturally choose to use platforms that offer competitive advantages. Additionally, our unique business model and exceptional network effects have also significantly contributed to our order growth. We selected a sample group of shippers who were active since 2021, and we found that the volume of fulfilled orders for this group of users increased by about 15% year-over-year in the third quarter. This illustrates our platform's resilience and stickiness as well as our strong network effect and extremely high entry barriers we have established in the long-haul road freight industry. The nationwide coverage and robust defensive mechanism of our platform created an irreplaceable advantage in the market. Looking forward to the fourth quarter, we anticipate that in line with the continued expansion of our user base, the steady improvement in our user engagement and stickiness coupled with the rise of the peak freight season, and the volume of fulfilled orders will continue to grow.

Thank you, Tom.

The next question comes from Eddie Wong with Morgan Stanley. Please go ahead.

Thank you, Chairman Zhang Hui, Chairman Simon, and Mao Mao for accepting my question. First of all, congratulations on the company's three-season performance, which is very superior to the previous one. My question is about the owner of the goods. As you can see, in the third quarter, the price of goods delivered to the owner of the goods reached 2.13 million yuan, which increased by 15% in the same ratio, and increased by 6.7% in the same ratio. I would like to ask what is the main reason behind this. Thank you, management, for taking my question. My question is regarding the Sherpa MAU. In the third quarter, the average SHPR MEU reached 2.13 million, which implies a 15% year-over-year growth and 6.7% quarter-to-quarter growth. What were the primary reasons behind this growth, and how can you describe the user structure? What's the expected growth rate for the fourth quarter? Thank you.

Thank you, Eddie. In the third quarter, we witnessed continued rapid growth in the average shipper monthly active user base. This growth can be attributed to two primary factors. First, our effective user acquisition strategy played a very important role. Through a combination of online promotions and offline field marketing, we have expanded the platform's brand exposure and recognition effectively attracting more users to join the platform. For online, we have primarily employed methods such as app store promotions, sponsored content and information feeds, and search engine marketing to reach out to potential users. Offline, our field marketing teams and the vehicle sticker have played a substantial role in acquiring new users, especially direct shippers. Secondly, we have continually refined our product features and services, including the introduction of simplified shipping processes and optimization in our lesson truckload services. These measures have significantly improved the conversation rate of new users and increased engagement and loyalty of existing users. making them more inclined to use our platform for shipping. From a user structure perspective, there has been a sustained increase in the proportion of direct shippers. The average miles of direct shippers has experienced nearly 17% year-over-year growth. As we look ahead to the fourth quarter, we will continue to closely monitor changes in user activities and user structural changes. We will strive to execute proactive user acquisition strategies and explore new business and product models to attract more high-quality direct shippers.

Thank you so much.

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

Please go ahead. In the third quarter, revenue from the freight brokerage service grew by 18.4% year-on-year maintain a very strong growth record. How should we understand the current competitive landscape of this freight brokerage industry and the Food Truck Alliance position in this field? Thank you.

Thank you, Charlie. In recent years, the freight industry has faced a series of challenges, particularly the impact of the pandemic. This led to the closure of several small freight brokerage platforms due to insufficient cash flow, resulting in a gradual reduction of players in the market. The major players in the industries are now predominantly medium to large size national trade platforms. However, these large platforms often provide relatively singular product offering, which users who are highly price sensitive and exhibit low brand loyalty Furthermore, such platforms typically have relatively weak freight matching capabilities and suffer from a lack of available orders, making it difficult to attract a large number of truckers. As a result, they primarily rely on invoicing or other services to generate profit. In contrast, FTA leverages its leading position in the industry and the nationwide networks to establish itself as a prominent brand, enhance freight matching efficiency, and lower user acquisition cost, and maintain relatively high gross margin compared to competitors. Currently in our freight brokerage service, nearly 50% of orders are completed through platform-assisted freight matching, meaning that shippers who use our freight brokerage service has genuine needs to get a match for stranger truckers. Through cross-selling services such as closed loop commission and value added services, FTA has created a diverse and comprehensive product mix and monetization model. This comprehensive advantage has allowed FTA to stand out in a highly competitive market and maintain higher service fees, solidifying its market position The company's capabilities and business model enables provision of high-quality freight services to meet user demands and generate sustainable profits.

Thank you so much.

The next question comes from Brian Gong with Citi. Please go ahead.

Good evening, Chairman Jiang, Chairman Simon, Chairman Mao. First of all, congratulations on your very good performance. I have a very quick question about our membership fee. The revenue of the third quarter's membership fee has increased by 5.6%. It looks a little slower than the revenue of the other parts. Can you further introduce the growth of the main members of this quarter and what kind of operating strategies and measures will be taken in the future to promote the growth of membership fees? I will translate myself. In the third quarter, membership-free revenue increased by 5.6% year-on-year, which was lower than the other segments. Could the management please provide an update on the growth of Shipper members in the third quarter, and what operational strategies and measures will be taken in the future to drive the growth of membership-free revenue? Thank you.

Thank you, Brian. Since 2018, we have been monetizing the Freight Yellow Page service through the introduction of membership system. Members enjoy more privileges than non-paying users, including the ability to post orders. Currently, there are two membership tiers. The first tier members paying an annual fee of RMB 688 allowing them to post up to 100 orders per year, primarily serving mid to low frequency direct shippers. The second tier membership is designed for high frequency shippers who pay an annual fee of RMB 1,688, enabling them to post up to 1,688 orders per year. The platform occasionally introduces membership benefits to ensure that members receive additional order posting rights. From an operational synergy perspective for high-frequency shippers, FDA has achieved a high level of user penetration compared to the traditional model where shippers had to pay at least 10,000 RMB for logistic park rental fee. FDA has gradually replaced logistic parks and the cost per shipment is reduced to less than 1 RMB $1 per order. Membership fees are significantly cheaper compared to traditional logistic park booth rental fees. For this user segment, FTA mainly monetizes through cross-selling value-added services and commissions, increasing the revenue scale of our other business. For mid- to low-frequency direct shippers, new shipper users entering the platform are mostly direct shippers. Hence, the number of 688 members has been steadily growing over the past few quarters. Looking at the market size of millions of small and medium-sized business owners in China, there's still considerable growth potential. However, we observed that the number of orders corresponding to 688 members exceed the usage needs of some low-frequency users. And based on this, our operation team are actively devising product strategies in attempt to develop packages that are more suitable for low-frequency shippers. Additionally, while the ARPU for direct shipper members appears relatively low, their freight rates are higher and they exhibit better fulfillment rates, offering greater monetization potential through commissions and cross-selling value-added services. In the long term, direct shippers are not only the main driver force for future membership fee growth, but also present opportunities for growth in other business lines.

Thank you.

The next question comes from Qi Lu Li with CICC. Please go ahead.

Thank you for accepting my question. I have a question. We have observed that We noticed that the penetration rate of the commission model in the quarter was around 58%. slightly lower than 59% in the previous quarter. What are the main reasons for this? Thanks.

Thank you. That's a good question. In the past quarter, revenues from commission model reached around RMB 600 million, increasing by over 54% year-over-year. This strong growth was primarily due to the overall increase in order volume and continued improvement in commission rates. Operationally, we have been primarily focused on scaling the platform as a whole with no additional city extension or significant adjustment to our commission strategy. Nevertheless, we have conducted stress tests with higher commission rates in certain cities to prepare for potential future increase in commission rates and penetration rates. The penetration rate of a particular transaction type is defined as the number of commission orders for the transaction divided by the number of total order volume. At the time of our IPO, back in 2021, our short-haul transaction commission business was very small. Hence, it was classified under the value-added services line of our revenue. The transaction commission revenue line does not include short-haul contribution. So when calculating penetration rate, the numerator excludes fulfilled short-haul orders, while the denominator includes both long-haul and short-haul orders. In the past quarter, the penetration rate was approximately 58%, showing a slight decrease compared to the previous quarter, primarily due to the fast increase of short-haul-perfume orders under our Shengsheng brand. The commission penetration rate for long-haul orders remains stable quarter over quarter. Looking ahead, our focus will remain on increasing the penetration rate of our commissioned model and adjusting commission rates. Both are critical metrics for our core business We will achieve this through operational optimization and market extension to ensure sustained rapid growth.

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

Thank you once again for joining us today. If you have any further questions, please feel free to contact us at 4Chalk Alliance or TPG Investor Relations. Our contact information for IR in both China and the US can be found in today's press release. Have a good day.

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