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 forward-looking statements relating to the Company's future performance, which are intended to qualify for the Safe Harbor from liability, as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the Company's control and could cause actual results to differ materially from those mentioned in today's press release and discussion. A general discussion of the risk factors that could affect FTA's business and financial results is included in certain filings of the Company with the SEC. The Company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures, for comparison 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. Simon Cai, 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.fulltruckalliance.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 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 Yunmanman and Huochebang 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 Yunmanman and Huochebang apps have resumed new user registration as of end 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. 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 recurrences continuing to emerge, it is clear that we will still face…

Thank you, Mr. Zhang, and hello, everyone. I'll 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, amid 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 an 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. The iterative upgrading and accurate push of our algo in the second quarter have 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 registrations, second quarter growth in our shipper MAU mainly came from the increased contribution of our direct shippers. Furthermore, in the second quarter, largely due to non-member to member conversion,…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brian Gong with Citi. Please go ahead.

[Foreign Language] I will translate myself. Thanks management for taking my questions. Congratulations on a solid second quarter results. We have seen that the company announced the commission rules and the cap on commission rates at the end of June. Can management share how will this have any real impact on commission plans in the future? Thank you.

[Foreign Language]

We announced that the commission rules may need to increase our pricing mechanisms transparency and help truckers understand the whole operating process. The publicized commission rules have already taken into account with the company's long-term business plan and future take rates ramp up. So we don't think this announcement will affect the progress of our monetization. From business perspective, our take 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 Keung with Goldman Sachs. Please go ahead.

[Foreign Language] We've seen that the average freight rate GTV versus orders, divided by orders in the second quarter was nearly RMB2,400, so that was a 15% year-on-year increase, 10% Q-on-Q. So what are the main reasons for that and how should we exceed the trend going forward? Thank you.

Thanks Ronald. This is Simon Cai here. I will address your question. So first of all, in the second quarter, we see an increase in the freight rate on a 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 the 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 rate materializes slowly over time with a certain lag effect. So it gets 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 downwards.

Thank you, Simon.

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

[Foreign Language] What are the changes in user composition and the user activity as well as GTV and order composition in the second quarter amid the COVID-19 resurgence and weak macro conditions? Thank you.

Thank you. Overall, we think the GTV contribution of direct shippers in the second quarter remained 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-member shippers to upgrade to the membership program. This drives an increase in the number of existing members. Most of these non-member shippers upgrade to our 688 membership level, which is predominantly comprised of direct shippers. And such a strong growth, in the absence of new user – new member registration, again, highlights our shippers high dependence on the platform and represents a concrete step forward to – towards our long-term growth 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's effects in the second quarter, the freight rate fluctuated substantially. More users tended to undertake price negotiation rather than relying on the tap-and-go model. As a result, the GTV and order contribution of the negotiated model increased slightly during the period. However, as the outbreak abates, we expect our GTV and order contribution from our tap-and-go model to recover gradually. As we move forward with the resumption of new user registration, the market recovery and the continued conversion of direct shippers, we expect direct shippers GTV and order contribution to maintain a steady increase.

Thank you very much.

Our next question comes from Jiulu Li with CICC. Please go ahead.

[Foreign Language] The gross 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 trend in the 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 improvements. 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 Ivy Ji with Credit Suisse. Please go ahead.

[Foreign Language] Thanks management for taking my question. I have a question about our OpEx trend. So in the second quarter, we have seen a very disciplined OpEx spending, especially for sales and marketing, which fell by 17% year-over-year. So just wanted to understand what's the key reason for this change? And how should we think about the OpEx and sales and 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 the 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 Hou with TH Capital. Please go ahead.

Good morning management. I just have one question. So there is a lot of discussion about Chinese authority and the SEC's dialogue regarding the auditing paper – working paper. So at this point, we know we haven't reached agreements, but making progress. So just wonder what is your view on the potential delisting risk if the two governments cannot reach agreement for 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 list in 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 Mao Mao 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 Full Truck Alliance directly, or TPG 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.