Full Truck Alliance Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 23, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen, good day, and welcome to Full Truck Alliance's Second 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.

Speaker 1

Thank you, operator. Please note that this 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 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 The results are included in certain filings of the company with the SEC.

Speaker 1

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 purposes 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 senior management are Mr. Hui Zhang, our Founder, Chairman and CEO and Mr.

Speaker 1

Sanem Tai, our CFO. Management will begin with prepared remarks and the call will conclude with a Q and 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 fire.fotalkalliance.com. I will now turn the call over to our Founder, Chairman and CEO, Mr.

Speaker 1

Zhang. Please go ahead, sir. Hello, everyone. Thank you for joining us today on our Q2 2023 earnings conference call. In the Q2, we continued accelerating the industry's digital and intelligent evolution, while maintaining our vision, User centric value oriented to fortify our business and boost our market share gains.

Speaker 1

These efforts have considerably paid off by solidifying our market leading position and giving us the ability to make a series of important advancements. During the quarter, our intense focus on the long haul full truckload business enabled us to further enhance the segment's market penetration Centered around our core value proposition of better, faster and more economical shipping, we assisted enterprises to reduce logistic costs And improved efficiency, which helped to strengthen our users' competitive edge in logistics. Furthermore, we made significant developments in broadening our user Through our relentless product upgrades and effective online and offline operations, which drove our revenue growth to new levels. These critical accomplishments are attributed to our efforts in deeply cultivating the industry's digitalization, our unique business model and our team's outstanding execution capabilities. As a result of our hard work and commitment, we achieved several new milestones in the 2nd quarter.

Speaker 1

In regard to our user scale, both our professional shipper users and direct shippers recorded stellar growth with the average shipper MAU jumping to a historical high during the quarter, growing by 30.5% year over year to 2,000,000. The growing number of our high quality direct Trippers elevated our overall fulfillment rate. Additionally, we rolled out a series of new product functions, including a streamlined shipping process, Standardized introsive shipment services, a comprehensive truckers' rating system and more efficient order recommendation strategy for truckers, which significantly improved the shippers' experience, particularly direct shippers, as well as strengthened truckers' stickiness, driving the number of dispute orders to 40,200,000, an increase of 44.5% year over year. On top of our outstanding operational highlights, we achieved strong growth momentum in both our top and bottom lines, which increased by 23.5% and 170.8 percent year over year, generating revenue of RMB262 million and non GAAP adjusted net income of RMB 722,700,000 respectively, surpassing market expectations once again. However, when looking at the millions of SMEs in China and the RMB 1,000,000,000,000 logistics sector, our online penetration rate remains In terms of both user and order scale, moving forward, along with our expanding market share gains in FTL, We expect to continue to reap additional benefits as we consistently improve both monetization and operational efficiency Looking ahead at the second half of the year, we firmly believe that to continue creating value for our users and the whole industry.

Speaker 1

With our users at the heart of FDA's growth, We remain committed to our user oriented value proposition as we continually optimize our services on all fronts, while simultaneously elevating user satisfaction by offering superior services and products that better cater to users' needs and preferences. In line with this commitment, we are stepping up our investments in technology to propel FDA's transition towards a more digitally empowered platform so that we can proficiently manage our teams and achieve a higher level of operational efficiency. Going forward, we are proactively responding to the changing market dynamics as we turbocharge our growth momentum across our platform through cutting edge innovation. We will also keep an eye out for potential growth opportunities that fit FDA's one stop business model as well as more effective approaches to acquire and retain users. As we further expand our user base and revenue scale, we aim to build additional value for our different stakeholders.

Speaker 1

Thank you, everyone. Let me pass the call over to our CFO, Simon, who will share our operational progress and financial results for the quarter.

Speaker 2

Thank you, Mr. Zhang, and thank you to everyone for joining today. I'll first go over our highlights for the Q2 of 2023, followed by a brief overview of our operational and Financial results before opening the call to questions. For the past quarter, we delivered an impressive year on year growth Info field orders of 44.5 percent. Despite challenges from high temperatures And extreme weather in June, there was no clear sign of a slowdown in order volume.

Speaker 2

Our average daily order volume during the quarter surged To a historical high, benefiting from improving due end user scale and activities, as well as enhanced matching efficiency. 2 years contributed to a larger number of users meeting their shipping needs through online platforms, which is faster, safer and more convenient. Building on this momentum, we continue to expand our market share in the quarter. With the industry continuing to normalize, our average fulfillment rate grew by roughly 10 percentage points year over year and 2 percentage points quarter over quarter in the second quarter to 30%. It is worth mentioning that the average fulfillment rate of our 688 members exceeded 50% this quarter.

Speaker 2

This continued improvement in matching efficiency was driven by both sustained growth in due end User scale and the ongoing optimization of shipper composition. We also successfully improved our products Strategically integrating technologies and using algorithms along with Our efficiency and accuracy of freight matching. Looking at the transaction types, we're raising demand from direct shippers, The proportion of non negotiation based transactions, such as tap and go and entrusted shipment models continue to increase, reflecting our platform's pricing power and users' enhanced reliance. In regard to our users, We have made remarkable strides in broadening our user base with our average ship profiles exceeded 2,000,000 for the first time in history, increasing by 30.5% year over year. The increase was mainly from 688 members and non member shippers, Which were up 25% 40%, respectively, the majority of which are direct shippers.

Speaker 2

The continued growth of shipper miles year to date is mainly driven by the increasing stickiness and During the Q2, as the supply of truckers increased, our average trucker miles responding to orders increased quarter over quarter With 3,780,000 active truckers fulfilling orders through FTA over the past 12 months, This shows that more truckers are choosing our platform for finding cargo rather than relying on offline models of trading. Meanwhile, our 12 months rolling retention rate of shipper members and next month's retention of truckers who responded to orders We remain stable quarter over quarter, once again confirming our platform's high user stickiness. Going forward, we will continue to focus on the livelihoods of truckers and shippers, as well as local industry developments Across different regions nationwide for further market penetration by verticals. We'll also explore and capitalize on benefits in addition to strengthening our connection with the real economy and SMEs. By refining our user composition and increasing the fulfillment Rate and user retention, we're successfully building a thriving platform ecosystem that generates long term value.

Speaker 2

As Mr. Zheng just commented, we have built our foundation by creating value for shippers and truckers. Since our inception, we have been Committed to cracking down on maliciously low priced shipments and maintaining a fair and normal transaction order in the market. Recently, the platform has launched a targeted product that utilize big data and algorithm to predict, Identify, analyze and automatically judge low price offers. This has significantly improved Truckers' efficiency in fighting cargo and unable shippers to dispatch their group faster.

Speaker 2

In addition to adjusting control and governance of malicious, low prices and other behaviors, we have also carried out a series of measures on The product functions and are actively guiding the freight rate. For example, when shippers bid is low, the user page will automatically remind the to increase the price before placing the order. It will also send a reminder of the price increase in case there's no transaction within certain period of time. In order to help some of the new shippers offer reasonable prices, the platform will also display around 90 days Similar sources of historical transaction prices for the shippers reference. Although currently there is an oversupply of truckers, we still thrive to find a dynamic balance between And shippers through the combination of providing price range control and pricing guidance.

Speaker 2

This approach is gradually address The industry's pain point of low freight rate. Before going over the quarter's financial results, I will quickly review the progress of our transaction commission model. We're very delighted to report revenue from online transaction service surged 59.6 percent to RMB565.2 million. This is driven by our solid increase in the number of field orders and commission per transaction. With our user base and order volume continue to grow, We expanded our commission model coverage.

Speaker 2

In the Q2, around 59% of the transactions were viewed through us We're closed under our commission model as compared with roughly 53% a year ago, generating an average commission per transaction of around RMB23.4. As we further optimize revenue streams, transaction commission will remain A major growth driver of our revenue. Now, I'd like to provide a brief overview of our 2023 second quarter financial results. Our total net revenues in the second quarter were RMB RMB2.62 billion representing an increase of 23.5% year over year. This increase in revenue was primarily attributable to an increase in revenues from freight matching services.

Speaker 2

Revenues from freight matching services, including service fee from freight brokerage models, membership fees from listing models And commissions from online transaction services were RMB1731.2 million in The Q2 representing an increase of 22.8% year over year, primarily due to an increase in revenue from freight brokerage service As well as continued growth in transaction commissions, our revenues from freight broker service in the Q2 were RMB 948 900,000, up 11.6% year over year, primarily attributable to continued growth in freight volume as a result of expanded user coverage. Our revenues from free listing service in the Q2 were RMB227.1 Revenues from transaction commissions amounted to RMB555.2 million in the 2nd quarter, up 59.6 percent year over year, primarily driven by an increase in order volume as well as an improvement Our revenues from value added services in the Q2 were RMB330.8 million, up 27% year over year, mainly attributable to an increase in revenues from credit solutions and other value added services. Cost of revenues in the 2nd quarter was RMB975.3 million compared with RMB925 RMB900,000 in the same period last year. The increase was primarily due to an increase in VAT related tax surcharges and other tax Net of tax refunds from government authorities.

Speaker 2

These tax related costs net of refund totaled RMB879.3 million, representing an increase of 4% year over year, primarily due to A continued increase in transaction activities involving our freight brokerage service. Sales and marketing expenses in the second quarter were RMB RMB281.8 million compared with RMB196.2 million in the same period last year. The increase was primarily due to an increase in advertising and marketing expenses for user acquisitions. General and administrative expenses in the 2nd quarter were RMB201.7 million compared with RMB300 and 44,800,000 in the same period last year. The decrease was primarily due to a lower share based compensation expenses.

Speaker 2

R and D expenses in the quarter were RMB223.7 million compared with RMB216.4 million In the same period last year, the increase was primarily due to higher salary and benefits expenses. Our income from operations in the 2nd quarter was RMB333.8 million compared with a loss of 46,400,000 in the same period last year. Net income in the quarter was RMB 609,000,000 compared with RMB12.7 million in the same period last year. Under non GAAP measures, our adjusted operating income in the 2nd quarter was RMB450.7 million, an increase of 1 Our adjusted net income in the 2nd quarter was RMB722.7 million, an increase of 170.8 percent from RMB266.9 million in the same period last year. Basic and diluted net income per ADS were RMB0.57 In the Q2 compared with basic and diluted net income per ADS of RMB0.01 in the same period last year, Our non GAAP adjusted basic and diluted net income per ADS were RMB0.68 in the 2nd quarter compared with RMB0.25 in the same period last year.

Speaker 2

As of June 30, The company had cash and cash equivalents, restricted cash, short term investments and long term investments of RMB27.4 billion in total compared with RMB26.3 billion as of December 31 last year. In the Q2 of 2023, net cash provided by operating activities was RMB707.7 million. For our business outlook for the Q3 this year, we expect our total revenue to be between RMB2.16 billion and RMB2.2 billion, representing a year over year growth rate of approximately 19.2 percent to 21.6 percent. This forecast reflects our current and preliminary views Lastly, I would like to provide a brief update on our share repurchase progress. From May 22 to August 22, We have repurchased approximately 13,800,000 ADS shares amounting to approximately US87 $1,000,000 Since the announcement of our repurchase program, we have repurchased a total of around 19,400,000 ADS shares on the open market with a total value of approximately US124 $1,000,000 In the future, we will continue to utilize prudent repurchase method to reward our shareholders.

Speaker 2

That concludes our prepared remarks. We would now like to open the call to Q and A. Operator, please go ahead.

Operator

Thank 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. Today's first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

Speaker 3

Thank you, management, Don Huizeng and Simon. I want to ask that the fulfillment order growth was very strong at 44.5 Percent and at a rate that has been much faster than the overall freight market. So can you share the reasons And how should we anticipate for order growth into the Q3? Thank you.

Speaker 2

Thank you, Ronald. As you know, we're a leading digital freight We continue to gain market share in the food truckload market since the beginning of the year, Driving the rapid growth of our freight volume, excluding the low base effect from last year's lockdown in eastern part of China and impact of the Chinese New Year in the Q1. We see the main reason for the substantial year over year and quarter over quarter growth in order volume in the second quarter as The first, the fact that we further enhanced our transportation supply was critical in driving The growth in order volumes in the Q2, in addition to the removal of last year's travel restrictions, Our operation, marketing and product teams worked extensively on a series of operational activities. We also refined rules within the trucker rating system and introduced incentives to enhance the engagement And fulfillment rate of our truckers. These efforts ensured the transportation capacity and quality resulting in A continuous increase in order volume.

Speaker 2

The second point I want to make is the expansion of our user base. Our average shipper miles, as I said, exceeded 2,000,000 for the first time in history. This is a significant milestone for us. And this achievement was driven by implementing 2 key strategies. The first is on user acquisition Through targeted promotional campaigns to strengthen our brand awareness, we also continue Gaining traction with new users, especially high quality direct shippers.

Speaker 2

As a result, we saw a continued increase In order volume and our market share further expanded. The second point for this I want to make is on the product Experience improvement, we remain focused on refining operations and providing customized services, Which are centered around our core value of speed, quality and cost effectiveness And further enhancing shippers recognition and dependence on the platform. These two Activities resulted in the Increasing frequency and activity of our shippers. And Yes. Both the activity and shipping frequency of shippers of various types Reached a new level compared with the previous quarter.

Speaker 2

Looking ahead to the coming quarter, we maintain an Optimistic outlook for the growth in order volume, despite the potential impact of extreme weather conditions Such as typhoons and heavy rainfalls, we noted that the effects are limited in June in terms of duration And the provinces affected in August contribute relatively less to the platform's overall order volume. So we're confident that Through ongoing enhancement in user operations and services, we will continue to improve our market share and

Operator

Thank you. And our next question comes from Eddie Huang with Morgan Stanley. Please go ahead.

Speaker 3

Thank you, management, for taking my question. In the second quarter, the fulfillment rate exceeded 30% for the first time With significant year over year and quarter over quarter growth, what are the main driving factors behind this growth And how do you expect the trend in the fulfillment in the future? Thank you.

Speaker 2

Thank you, Eddie. First, the improvement in the fulfillment rate is primarily attributed to the enhancement As the pandemic is behind us, this lead to a comprehensive recovery in the margin efficiency. Building on this momentum, we have implemented various operational strategies, including the trucker rating system introduced in the Q1 To increase the engagement and stickiness of high quality truckers, consequently raising the overall fulfillment rate. In the Q2, the daily active truckers seeking to take orders increased at a rate of year over year and reached over 1,000,000. This is the daily active trucker, which provides the platform with ample quality carrier capacity.

Speaker 2

The second point I want to make is the enhancement in fulfillment rate Also resulted from ongoing optimization of our shipper composition. In the past quarter, we continued to attract A substantial number of high quality direct shippers to our platform amount to approximately 2,000,000 shipper MAUs, Around 1,700,000 of them are low and medium frequency 688 members and non member shippers. The average fulfillment rate for both these shippers exceeded 50% in the second quarter, and most of them are direct shippers We have an inherent tendency towards high fulfillment rates, which contributed to the overall fulfillment rate improvement. Looking ahead, we anticipate a gradual increase in premium rate, primarily driven by the growth of direct shippers. While we might encounter some challenges from extreme weather such as high temperatures and heavy rainfalls In the Q3, we will continue to optimize our operational strategies, strengthen our transportation capacity management and provide incentives and support to high quality truckers so that we can maintain our efficient and high quality supply.

Speaker 2

And furthermore, we will remain focused on content user oriented products and services to increase users' Satisfaction and engagement.

Speaker 3

Thank you.

Operator

Thank you. And our next

Speaker 2

Can you please provide some update on the progress of shipper membership In the Q2, which has very robust growth, and what are the main reasons for this growth? And also, how do we envision the growth of member users and membership fee revenue in the future? Thank you. Thank you, Charlie. Since our new user registration only resumed last year, we have been consistently attracting more shipper users, particularly those direct shippers to join our platform.

Speaker 2

Through a combination of online branding efforts, Multi channel promotions and offline campaigns, we have successfully converted a portion of these Accumulated new users into new shipper members. Simultaneously, our existing shipper members showed high retention rates and With 12 month retention rates surpassing 80% this year. For us, the primary advantage of The shipper membership mechanism lies in enhancing user stickiness and engagement, which in turn attracts more truckers And Fuze healthy growth in both user members and order volume. Monetization through membership fees account as a secondary benefit. The majority of our new shipper users are direct clients, characterized by their high Engagement, low frequency and higher service expectation compared to professional shippers.

Speaker 2

As a result, Our membership conversion strategy focused on optimizing user experience and providing value added services that appeal to direct clients such as priority matching, expedited shipping and discounts on freight insurance to incentivize In the future, we will continue to refine our user acquisition and membership conversion strategies. We believe that China's extensive community of small and medium sized enterprises will contribute to our potential use of Fu And thus further increasing the number of shipper members. From a monetization standpoint, There's still room for improvement in membership conversion rates. Taking into account the impact of new user subsidies, We anticipate a single digit year over year increase in membership fee revenue for this year.

Operator

Thank you. Our next question today comes from Brian Gong at Citigroup. Please go ahead.

Speaker 3

I will translate myself. I have a very quick question on our margin. Our gross margin for the same quarter improved significantly, rising to 53% from 45% a year ago and also from 50% in the Q4 this year. Could you please elaborate more on the main drivers behind the GP margin Hu Man, thank

Speaker 2

you. Thank you, Brian. On a year over year basis, The improvement in our gross margin primarily stems from the ongoing optimization of our revenue structure, Notably, the contribution from commission based and value add basis services to total revenue continued to rise and these two segments tend to have Much higher gross margin compared to that of freight brokerage business and driving the improvement in the company's overall gross margin. In the Q2, after excluding the impact of freight brokerage business, the approximate gross margin increased To 85.6% compared with 84.4% in the same period last year. On a quarter over quarter basis, The change in gross margin is mainly impacted by the timing difference in tax rebates due to variations In the processing time of tax procedures and different tax rebate policies in various regions, this factor could lead to short term fluctuations In the gross margin, however, it is important to clarify that the timing difference in tax rebates does not affect The company's overall profitability, it simply causes slight variations in the gross margin within a certain timeframe.

Speaker 3

Thank you. That's very helpful.

Operator

Thank you. And our next question comes from Jilou Lee with CICC. Please go ahead.

Speaker 1

Thanks for taking my questions. I have one question about the recent announcement From several freight platform companies about lowering the maximum commission fees or membership fees on business.

Speaker 2

Thank you. Throughout our whole operation history, we have maintained a very prudent approach And our current commission rate is still low and far from reaching any limits. The recent regulatory guidelines issued by authorities like Ministry of Transportation can be seen as More of a positive development for our platform instead of suppressing commission fees. These regulations are intended to encourage platforms to adopt a more transparent and reasonable practice in their commission structures. We welcome these regulatory measures and view them as a positive step towards providing a stable And sustainable operating environment, enabling us to operate with greater confidence in the future.

Speaker 2

In regards of our business, the recent adjustments to the maximum commission fee has not had a negative impact on the platform. For instance, the upper limit of commission for our entrusted shipment model Has been lowered by roughly 10% from the original RMB199 In the future, we will introduce various types of products and value added services for shippers, Thereby diversifying our revenue streams, we believe that by optimizing fee composition and expanding service offerings, The platform economy will raise more opportunities as well as creating more room for growth. Additionally, our Ecosystem and strategic positioning in the industry provide us with inherent competitive advantages. We will continue to strengthen the development of our ecosystem, introduce innovative services And solutions to bring greater value to our users and this approach will further drive the development and advancement of the freight transportation

Operator

I'd like to turn the conference back over to Mao Mao for any closing remarks.

Speaker 1

Thank you. Thank you, Operator, and thank you, everyone, for joining us today. If you have any further questions, please feel free to contact us at Fortruck Alliance directly or TPG Our contact information for II in both China and the U. S. Can be found in today's press release.

Speaker 1

Have a great day.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines and have a wonderful day.

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