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.

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 Chief Executive Officer, and Mr. Simon Cai, our Chief Financial Officer. 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 conference 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.

[Foreign Language] [Interpreted] Hello everyone. Thank you for joining us today on our second quarter 2023 earnings conference call. In the second quarter, we continued accelerating the industry's digital and intelligent evolution while maintaining our vision, user-centric, value-oriented, to fortify our businesses and boost our market share gains. 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 this 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 improve efficiency, which helped strengthen our users' competitive edge in logistics. Furthermore, we made significant developments in broadening our user base 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 second quarter. 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 historic high during the quarter, growing by 30.5% year-over-year to 2 million. The growing number of our high-quality direct shippers elevated our overall fulfillment rate. Additionally, we rolled out a series of new product functions, including a streamlined shipping process, standardized entrusted shipment services, a comprehensive truckers' rating system and more efficient order recommendation strategies for truckers, which significantly improved the shippers' experience, particularly direct shippers, as well as strengthened truckers stickiness, driving the number of fulfilled orders to 40.2…

Thank you, Mr. Zhang, and thank you to everyone for joining us today. I will first go over our highlights for the second quarter 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-over-year growth in fulfilled orders of 44.5%. Despite challenges from high temperatures and extreme weather in June, there was no clear sign of a slowdown in order volume. Average daily order volume during the quarter surged to a historical high, benefiting from improving dual-end user scale and activity, as well as enhanced matching efficiency. In addition, the recovery from the pandemic, combined with a series of new structural changes in the industry over the past two 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 continued 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. This continued improvement in matching efficiency was driven by both sustained growth in dual-end user scale and the ongoing optimization of shipper composition. We also successfully improved our products by strategically integrating technologies and using algorithms along with strengthening our efficiency and accuracy of freight matchings. Looking at the transaction types, with rising demand from direct shippers, the proportion of non-negotiation-based transactions, such as tap-and-go and entrusted shipment models, continued to increase, reflecting our platform's pricing power and users' enhanced reliance. In regard to our users, we have made remarkable strides in…

Thank you. [Operator Instructions] Today's first question comes from Ronald Keung with Goldman Sachs. Please go ahead.

[Foreign Language] Thank you, management. I want to ask that the fulfillment order growth was very strong at 44.5% and at a rate that has been much faster than the overall freight market. So, can you share the reasons behind? And how should we anticipate for order growth into the third quarter? Thank you.

Thank you, Ronald. As you know, we're a leading digital freight platform. We continue to gain market share in the full 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 the impact of the Chinese New Year in the first quarter, we see the main reason for the substantial year-over-year and quarter-over-quarter growth in order volume in the second quarter as follows: The first, the fact that we further enhanced our transportation supply was critical in driving the growth in order volumes in the second quarter. In addition to the removal of last year's travel restrictions, our operations, marketing and product teams worked extensively on a series of operational activities. We also refined the rules within the trucker rating system and introduced incentives to enhance the engagement and fulfillment rate for truckers. These efforts ensured the transportation capacity and quality resulting in a continuous increase in order volume. The second point I want to make is the expansion of our user base. Our average shipper MAUs, as I said, exceeded 2 million for the first time in history. This is a significant milestone for us. And this achievement was driven by implementing two key strategies. The first just on user acquisition through targeted promotional campaigns to strengthen our brand awareness. We also continued to gain traction with new users, especially high-quality direct shippers. 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 the -- 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 our platform. These two activities resulted in the increase in 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. 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 know 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 use of operations and services, we will continue to improve our market share and sustain our position as a market leader.

Thank you, Simon.

Thank you. And our next question comes from Eddy Wang with Morgan Stanley. Please go ahead.

[Foreign Language] Thank you management for taking my question. In the second quarter, the fulfillment rate have 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.

Thank you, Eddy. First, the improvement in the fulfillment rate is primarily attributed to the enhancement of our transportation capacity. As mentioned earlier, we have significant alleviated the shortage of truckers as the pandemic is behind us. This lead to a comprehensive recovery in the matching efficiency. Building on this momentum, we have implemented various operational strategies, including the trucker rating system introduced in the first quarter to increase the engagement and stickiness of high-quality truckers, consequently raising the overall fulfillment rate. In the second quarter, the daily active truckers seeking to take orders increased at a rate of high teens year-over-year and reached over 1 million, this is the daily active trucker, which provides the platform with ample quality carrier capacity. 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. Among -- there are approximately 2 million shipper MAUs, around 1.7 million 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 who have an inherent tendency towards high fulfillment rates, which contributed to the overall fulfillment rate improvement. Looking ahead, we anticipate a gradual increase in fulfillment 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 third quarter, 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. And furthermore, we will remain focus on enhancing user-oriented products and services to increase users' satisfaction and engagement.

Thank you.

Thank you. And our next question today comes from Charlie Chen at China Renaissance. Please go ahead.

[Foreign Language] Can you please provide some update on the progress of shipper membership in the second quarter, which has a 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. Through a combination of online branding efforts, multichannel 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 stickiness, 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 fuels healthy growth in both user members and order volumes. Monetization through membership fees comes 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. 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 of freight insurance to incentivize new shipper users to become members. 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 user pool 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.

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

[Foreign Language] I will translate it myself. I have a very good question on our margin. Our gross margin for the second quarter improved significantly, already into 53% from 45% a year ago and also from 50% in the first quarter this year. Could you please elaborate more on the main drivers behind the GP margin improvement? Thank 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 continues to rise, and these two segments tend to have a much higher gross margin compared to that of freight brokerage business, and driving the improvement in the company's overall gross margin. In the second quarter, 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 the -- and 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 rebate does not affect the company's overall profitability. It simply causes slight variations in the gross margin within a certain timeframe.

Thank you. That's very helpful.

Thank you. And our next question comes from Jiulu Li with CICC. Please go ahead.

[Foreign Language] Thanks for taking my question. I have one question about the recent announcement from several freight platform companies about lowering the maximum commission fees or membership fees on business. What are your views on the impact of this announcement? Thank you.

Thank you. Throughout our whole operational history, we have maintained a very prudent approach and attitude towards commission rates. 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. 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 per order, yet it still remains significantly higher than the actual average commission per order we charge at the moment. 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 embrace 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'll 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 industry as a whole.

Thank you. And ladies and gentlemen, that concludes the question-and-answer session. I'd like to turn the conference back over to Mao Mao for any closing remarks.

Thank you, operator, and thank you, everyone, 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.

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