Mary Chen - IR Director Donald Yu - Co-Founder, Chairman & CEO Maria Xin - CFO.

Juan Lin - 86Research Vicky Wu - ICBC International.

Good day and welcome to the Second Quarter 2018 Tuniu Corporation Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mary Chen, Investor Relations Director. Please go ahead. .

Thank you, Andrew, and welcome to our 2018 second quarter earnings conference call. Joining me on the call today are Donald Yu, Tuniu’s Founder, Chairman and Chief Executive Officer; and Maria Xin, our Chief Financial Officer.

For today's agenda, management will discuss business updates, operational highlights and financial performance for the second quarter of 2018. Before we continue, I refer you to our safe harbor statements in earnings press release, which applies to this call as we will make forward-looking statements.

Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during this conference call are in RMB.

I would now like to turn the call over to our Founder, Chairman and Chief Executive Officer, Donald Yu..

Thank you, Mary. Good day, everyone. Welcome to our 2018 second quarter earnings conference call. During the second quarter of 2018, we continue our revenue growth continues to recover with packaged tour revenue increasing 29% year-over-year.

Europe continues to recover strongly, while other destinations such as Australia, New Zealand and Americas also served as drivers for growth during the second quarter.

However, external events impacting a number of our other destinations such as Maldives and Bali continue to affect us and have resulted inactive growth in certain destinations during the second quarter.

Despite such external factors Tuniu continues to make improvements to its operations in order to develop as a company that is able to effectively capture the future of China’s leisure travel industry. With Tuniu’s company value of customers first in mind, we continue to innovate technology and create products catered towards our customers demand.

This has allowed Tuniu to better understand our customers' preferences and has allowed us to efficiently increase customer retention by matching suitable products to the right customers at the right time. During the quarter, we also continue to make strong strides in the development of our sales and service network.

Our sales network continues to have Tuniu expand the reach of our products and services to the greater audience. In addition to increasing our coverage, our sales network also allow us to create highly targeted campaigns based on the sales channel and customer demographics within these channels.

We also made strong progress in expanding our service network as direct procurement and our local tour operators both grew during the quarter. Direct procurement as a percentage of our package tour GMV reached more than 55% during the second quarter of 2018.

We have also successfully transitioned customer demand to our own local tour operators in a number of destinations. For example, in Xiamen, over 90% of our organized tours was served using Tuniu’s own local tour operators.

Our emphasis on the service network has allowed Tuniu to better control the quality of products and service offered to our customers, compared to traditional platform models. In addition, for our direct procurements products and products using our local tour operators, Tuniu is able to receive higher gross profit for this product.

Now I would like to give an update on our strategies in greater detail. I’ll first start with our offline retail stores, which is one of the central components in our sales network. As of August 2018, we have 308 offline retail stores across China. As we continue to upgrade our offline retail stores, we are gaining valuable experience.

For example, we are able to create more customized marketing campaigns based on the preferences and cultures within each region. During the first half of 2018, our offline stores contributed more than 13% of our packaged tour GMV. Also our offline retail stores, initially only offered a packaged tour product to our customers.

However, because of the differentiated needs of our customers, we have started to offer offline store customers the full range of products such as air ticketing, hotel booking, customized tours and corporate client booking services.

This allows Tuniu to better leverage its diversified product offerings to give our customers in offline retail stores a complete online experience. Additionally, we are launching a new WeChat mini program developed for our offline retail stores, in late August.

This mini program is designed to give our offline retail stores the ability to better engage users after their store visit. The mini program we have featured personalized the conditions and fully online booking.

By leveraging our operational expertise and expanding our product offerings, we are able to reduce the amount of high ethics for each store to reach profitability. Within a year of launch, most stores are able to fully return the initial investments. As our offline retail model matures, we plan to continue expanding our offline retail store network.

We are also pushing for the integration between our offline platform and the offline retail stores -- so between our online platform and offline retail stores, so that we can better leverage our advantages in products.

Our online platform features products, covering a large range of departure and destination cities, so customers can always meet their travel needs through our online platform. Tuniu’s offline retail store are complementary to our core online business and serve as a channel for distributing our online products.

After acquiring these customers through our offline stores, we are also able to transition them into our long-term user. In addition to our offline retail stores channel, we continue to make strong progress expanding our other sales channels.

For example, our TMC channel continue to maintain its growth momentum during the quarter, with revenue increasing over 130% year-over-year. Similarly GMV contributed by corporate clients has been steadily increasing, accounting for approximately 8% of our total GMV during the quarter.

Tuniu is also developing a number of mini program interpreted with social media platform, so that our customers are able to better share their travel experience or itinerary to their social circle. This notably have two benefits. First, we are able to better engage younger customers who are active on social media.

Second, we are able to leverage these tours to efficiently -- effectively lower our user acquisition cost by reaching into customers' social networks. Now I would like to talk about our progress in developing our service network. As of July 31, 2018, we have total of 25 local tour operators, of which 22 are based in China and 3 are based abroad.

Products sold by our local tour operators have several distinct advantages in terms of our product quality and economy of scale. In terms of product quality, the itinerary used by our local tour operators are designed based on user experience. Our itinerary are based on those that maximize customers’ experience.

In addition to designing schedules, we also directly hire the tour guide and prepare the local transportation used during the trip, further enhancing the customer experience during the trip. Economically, our local tour operators are able to quickly reach scale in each region due to Tuniu's large user base.

Once we develop a safe road we can quickly gain bargaining power and efficiently scale each local tour operator. We have also successfully integrated our local tour operator product into the travel plans, our self-guided tour travelers by allowing customers to sign up for tours as the destination.

Revenues generated from our local tour operators continue to grow at pace about 100% year-over-year. During the quarter as the vast majority of our direct procurement products in China now utilize our own local tour operators. With our service network in place, we are able to provide standardized and high-quality service to our customers.

Financially our service network is able to have increased Tuniu's overall blended take rate. We are also working closely with travel bureaus from across the world to create same tours. These tours are designed to give customers a complete experience of the destinations, from local culture and attractions all the way to local cuisines.

This is significantly different from traditional travel products designed around tour attractions. These products have been well received by travelers as Chinese consumers preferences in travel continue to shift from focusing on the price to focusing on the travel experience. Also Tuniu continued to execute its cost strategies during the quarter.

We continue to face headwinds on a number of fronts. As a result, we expect net revenues to decline year-over-year during the third quarter of 2018. Packaged tour revenues were being negatively impacted in a number of our key international destinations such as the Maldives, Bali and Philippines.

Domestically products for [indiscernible] Valley will also negatively influence our revenues. Our other revenue is expected to experience negative growth due to the requirements to a bundled product resulting in declined service fees from insurance companies.

Also in order to comply with the stricter standards imposed on the financial industry, we have also made adjusted to our financial service business unit to comply with the changing standards. This is expected to also negatively influence our other revenue for the third quarter.

Despite the expected decline, we remain on course to achieve non-GAAP profitability in the third quarter. Because the travel industry has a complex supply chain, we believe our commitment to developing our own sales and service network will differentiate Tuniu in the future from our peers within the industry.

We will have channels to efficiently reach and acquire users, while also processing the operational capability to full service our customers, using our own service network. Combining these two networks, we will develop Tuniu capable of capturing the future demand of China’s leisure travel industry.

I will now turn the call over to Maria Xin, our CFO for the financial highlights..

Thank you, Donald. Hello, everyone. Now I will walk you through our second quarter 2018 financial results in greater detail. Please note that all the monetary amounts are in RMB, unless otherwise stated. You can find the U.S. dollar equivalent of the numbers in our earnings release.

Starting from the second quarter 2018, net revenues were RMB525.3 million, representing 14% year-over-year growth. Revenues from packaged tours were up 29% year-over-year to RMB437.6 million and accounted for 83% of our total net revenue for the quarter. The decrease in was primarily due to the growth of organized tours.

Other revenues were down 27% year-over-year to RMB87.6 million and accounted for 17% of our total net revenues. The decrease was primarily due to the decline in revenues generated from financial services and service fees received from insurance companies. Gross profit was up 4% year-over-year to RMB250.8 million for the second quarter of 2018.

The increase in gross profit was primarily due to the increase in efficiency resulting from the economies of scale.

Operating expenses for the second quarter of 2018 was RMB371.9 million, down 30% year-over-year, excluding share-based compensation and amortization of acquired intangible assets, non-GAAP operating expenses were RMB312 million, representing a year-over-year decrease of 34%.

Research and product development expenses for the second quarter of 2018 was RMB77 million, down 47% year-over-year. Research and product development expenses as a percentage of net revenues were 15% in the second quarter of 2018, decreasing from the 32% in the corresponding period in 2017.

The decrease was primarily due to the increased in efficiency resulting from the economies of scale and refined management and optimization of research and product development personnel. Sales and marketing expenses for the second quarter of 2018 were RMB173.6 million, down 22% year-over-year.

Sales and marketing expenses as a percentage of net revenues was 33% in the second quarter of 2018, decreasing from 48% in the corresponding period in 2017. The decrease was primarily due to the optimization of promotional expense structures and preference for marketing channels with higher ROI.

General and administrative expenses were RMB129.3 million in the second quarter of 2018, down 22% year-over-year. General and administrative expenses as a percentage of net revenues were 25% in the second quarter of 2018, decreasing from the 33% in the corresponding period in 2017.

The decrease was primarily due to the increase in operating efficiency resulting from the economics of scale and the refined management. Net loss attributable to ordinary shareholders was RMB79.6 million in the second quarter of 2018.

Non-GAAP net loss attributable to ordinary shareholders, which excludes share-based compensation expense and amortization of acquired intangible assets was RMB19.4 million in the second quarter of 2018. As of June 30, 2018, the company had cash and cash equivalents, restricted cash and short-term investments of RMB1.9 billion.

In the second quarter excluding the impact of the payments to Hainan Airline Tourism cash conversion cycle was negative 27 days, the same as the corresponding period last year. Cash flow generated from the operations for the second quarter of 2018 was RMB300.3 million. Capital expenditure for the second quarter of this year were RMB28.8 million.

For the third quarter of 2018, Tuniu currently expect to generate RMB726 million to RMB756 million of net revenue, which represents 5% to 10% decrease year-over-year. Please note that the forecast reflect Tuniu’s current and preliminary view on the industry and its operations, which is subject to change. Thank you for listening.

We are now ready for your questions.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Juan Lin of 86Research. Please go ahead..

Hi. Good evening Donald and Maria. Thank you for taking my questions. My first question is on macro, I’m wondering if you have -- whether you noticed any changes in travel demand due to the recent dramatic fluctuation in foreign exchange rate and other macro factors.

And second question is on your guidance, could you please breakdown your third quarter guidance and elaborate the factors behind the year-over-year decline in Q4 revenue outlook? And also any color on Q4 outlook would be helpful. Thank you..

The travel sector in overall is often influenced by external factors. So during the third quarter, a number of our destinations were negatively impacted by certain external factors such as flood or volcano eruptions. So because of these external factors, a number of our customers were forced to change their trips.

So during the third quarter of this year, the number of external events that's occurring is a lot more than the number of events last year. But however, we believe these events are temporary and short lived in duration. As for your question about currency, we believe there is a certain amount of factor that has impacted travel demand due to currency.

But we believe this is not a significant part. And combining these two factors, we believe the change in demand is the shorter term influence, and we believe we should sort of focus more on the long-term competitive advantage of Tuniu..

For your second question, the guidance for the third quarter there are three main reason impact our third quarter. First, our other revenue is expect to experience negative growth due to the requirement to unbundle products. It will be impact our insurance service fees received from the insurance companies.

Second, in order to comply with stricter standards imposed finance industry; we have also made some restructure for our financial service business to combine with changing standards. So the other revenue in the third quarter will be expect to have a 35% to 45% decrease year-on-year. So this is the main reason that impact our guidance.

Lastly, so the packaged tour revenues also will be negative impact in the number of the key destinations as we already have mentioned such as the Mount East Valley and some destinations domestically and overseas..

Thank you Donald and Maria.

And also do you have any early read on Q4 performance?.

So we only give guidance for the next quarter currently, if we see some other change we will announce earlier..

Okay, thank you. .

So one thing let me add also despite of the headwinds in some destinations and impact in our other revenues. So we are remain on track of achieving the non-GAAP profitability for the third quarter this year..

Thank you, Maria and thank you, Donald. .

[Operator Instructions] The next question comes from Elaine Hee [ph], a private investor. Please go ahead..

Thank you management for taking my questions. I see there is a recovery in growth during the second quarter; can you give more details on the revenue distribution in terms of destinations? Thanks. .

Thank you for your questions. So, we see some destinations have healthy growth in the second quarter, such as Europe, the strong recovery in the second quarter and also the Australia [ph] amounted the growth rate is also much higher than our growth rate.

Because of the impact of headwinds in the certain destinations, so the Maldives and Bali for the distribution of our destinations a little bit change in the last quarter. Currently domestic tours contributed of about one-third of the total gross bookings, packaged tour gross bookings.

The Europe was contributed 20% and Southeast Asia 10%, Japan around 10% and the Coastline 8%, and the Island except Maldives about 5%, America drove 5% and we see Australia and the New Zealand together slightly less than 5% in the last quarter..

The next question comes from Vicky Wu of ICBC International. Please go ahead..

Hello, management, thank you for taking my question. My first question is regarding the future growth drive for the company.

Do we have any strategies to improve the monetization capabilities on platform as normally regulations negatively impact our revenue and the margins? And the second question is regarding the guidance, when do we expect the recovery of those certain destinations and do we have any strategies to shift the demand to other destinations like that? Thank you..

The influence of unbundling policy had impacted us for the past few quarters, but however we believe this should be also temporary in nature. In the long-term we believe the revenue from our other -- revenue will stabilize in the long run.

However, we are introducing a number of other value added services to our products, such as membership, this had helped us grow our other revenue as well. Okay, in terms of our strategy, we will focus first on developing our sales network, so this is divided into three components.

The first component is our offline stores, we continue to make excellent progress in increasing the number of stores. By the end of the year, we target 500 stores across China. So -- and as many investors can see, offline stores as a percentage of our GMV is on the rise. The second channel where we want to put increased emphasis is corporate clients.

TMC and other corporate client channel has been growing relatively quickly, and has maintained this higher growth rate. By having corporate clients, we are able to cross-sell a number of travel products to them, including my team building tours and so on.

So we expect this corporate channel to continue growing relatively quickly and we believe there is still a lot of room to grow. The last formal channel is social media, one of the ways we try to reengage with our customers is through the WeChat ecosystem. It has a lot of tools that we could use to actively engage with our users.

So, this is another formal channel that we are making push in..

[Operator instructions]. The next question comes from William Juan [ph] of BlueSky. Please go ahead. .

Thank you management for taking my question. I see Tuniu offline retail store expand very quickly and recently.

What’s your offline store expansion plan for the second half of 2018? Should we expect a significant increase in expenses, what’s the difference between traditional offline stores and Tuniu’s store?.

By the end of this year, we plan to have 500 stores. As for your question about the difference between our stores and other stores, we divide this into three parts. First of all, our offline retail stores are offer all of our products from online. So originally, when we first launched our retail stores we primarily only offer organized stores.

Now we offer everything we have online. So this includes corporate booking services, total tours, air ticketing, hotel booking and distribute services and products to clients. [Technical Difficulty] so our service is generally divided into two types. First is dedicated customer service and the second part is professional customer service.

So the dedicated customer service are often located within these offline retail stores.

They are able to solve the general questions for the consumer, but however, when the question gets too complex or the request is too complex, we could directly send the questions to our professional customer service, which are generally located at our call centers and our headquarters.

As for the third part, our offline stores are highly efficient in the sense that they could utilize a lot of the tools we develop internally. So this includes APPs -- our Tuniu APP a number of mini-apps and a number of customer management systems and other internal systems. So this allows our offline retail stores to highly efficiently grow.

So -- and this ultimately combines to make a complete O2O system. Thank you..

Thank you. I had one more question, what's the current state and the future plans for direct procurement in the tour operators.

When can we expect them to make a more meaningful contribution to our financials?.

During the quarter, direct procurement as a percentage of our package tour was 55%. We are currently focusing on making breakthroughs and direct procurement within Southeast Asia. We believe this is the ideal place given the relatively easy visa of policies, as well as close proximity to China.

We are transitioning our products from forming tour groups at the departure city to forming tour groups at the destinations. We believe this model has a lot of opportunities by combining air ticket with local tours. So overall, we believe this will bring some improvements to our margins in the long run. Thank you..

Thank you. It’s very helpful..

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

Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support. And we look forward to speaking with you in the coming months. Thank you..

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