Mary Chen - Director of Investor Relations Donald Yu - Founder, Chairman and Chief Executive Officer Maria Xin - Chief Financial Officer.

Zeping Zhao - ICBC International Ivy Ji - Credit Suisse.

Hello, and thank you for standing by for Tuniu 2018 Third Quarter Earnings Conference Call. At this time, all participants will are in listen-only mode. After managements prepared remarks, there will be a question-and-answer session. Today's conference is being recorded.

[Operator Instructions] I would now like to turn the meeting over to your host for today’s conference call, Director of Investor Relations, Mary Chen. Mary, please go ahead..

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

For today’s agenda, management will discuss business updates, operational highlights and financial performance for the third quarter of 2018. Before we continue, I'll 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 third quarter earnings conference call. We are excited to announce Tuniu achieved profitability during the third quarter of 2018, both on GAAP and non-GAAP basis. During the quarter, GAAP net income reached RMB28 million while non-GAAP net income reached RMB83 million.

Additionally, we were able to generate positive cash flow during the first three quarters this year. We believe our ability to achieve GAAP profitability this quarter and ability to achieve positive cash flows during the first three quarters of 2018 is a reflection of how our long-term strategies have positively received our Company’s financials.

Our achievement this quarter is significant step toward unlocking retail long-term value for our shareholders. While we were able to achieve strong profit during the quarter, we continue to face headwinds in a number of destinations as a result of external factors.

Notably, the boating incident in Thailand had negative impact on nearby regions and a number of Island destinations during the third quarter of 2018. While these external impacting regions continued to create headwinds, we continue to find growth in regions without the negative factors.

For example, Europe grew approximately 40% year-over-year during the third quarter of 2018, while Japan grew approximately 25%, both helping to partially offset the net effect from external impacted regions. In terms of the operation of the Company, we continue to make improvements to our efficiency in a number of ways.

We have been able to refine our systems so that our employees are able to get more done in less time. On the sales and marketing side, we continue to enhance our marketing channels in order to achieve the highest long-term return on our investment.

We are also finding better ways of engaging with our previous customers as repeat customers contributed to approximately 68% of our GMV during the quarter. Also, Tuniu's track procurement as a percentage of packaged tour reached 68% during the quarter.

These factors all have increased Tuniu's efficiency during the quarter as we were able to control our operating expenses and achieve stronger profits. Now, I would like to give update on our strategies in greater detail. First is our sales network. During the quarter, we continue to make progress expanding base.

On the mobile app front, we refined our app to maximize the user experience. Notably, we are continuing to test the new algorithms backed by big data that better match our customers with most suitable product and services. Results have been very positive in our cash so far, we kicked through rate increasing by approximately 20%.

Social marketing is another channel in our sales network that I would like to mention. During the quarter, we launched a number of tours for social marketing. These tours give individuals and small businesses the ability to distribute Tuniu's products and services to their social networks.

We have released the tour to our employees in our local retail stores and to our tour guide. Early data is positive and reflects quick adoption of the tour. In the future, we will release the social marketing tour to all affiliates of Tuniu, including our employees, partners and the loyal customers.

This will allow Tuniu to efficiently reach into the social networks of our affiliate. Due to the high efficiency and quick spreading nature of social marketing, we believe this channel will eventually grow to become a major distribution channel in Tuniu's sales network.

During the quarter Tuniu continued to make strong strides in the expansion of our offline retail stores, Difeng Cloud and the TMC channels. We added more than 100 offline retail stores, of course China here in the third quarter, bringing the total number outsources we opened this year to 251.

As of October 31, 2018, Tuniu operates 415 offline retail stores across China. In terms of sales contribution, our offline retail stores continue to gain traction with customers. During the quarter, offline retail stores contributed to approximately 15% of our package toward GMV compared to 9% during the third quarter of 2017.

In terms of financial, stores that have been open for six to 12 months on average cover more than 100% of their total direct expenses. Stores that have been open for more than a year are able to average cover 120% of their total direct expenses.

Our offline retail stores look like Tuniu's brand, comprehensive supply chain, strong customer service, technology and big data capabilities, bringing them to our customers' neighborhood. Those are the first to the point of context for many customers.

With our dedicated customer service representatives as they sought, we are able to quickly have our customers plan and book their next trip inside our local retail stores. Due to the strong financial and operating metrics of our offline retail stores, we plan to continue expanding our store count to approximately 500 stores by the end of 2018.

Tuniu's Difeng Cloud business maintained double-digit year-over-year growth during the third quarter and it continues to quickly scale as the only distributor to offer the complete suite of channel products and services.

During the first three quarters of 2018, the cumulative GMV generated on our Difeng Cloud distribution business reached RMB2.8 billion. Going forward, we will continue to increase the number of value added services on our B2B platform in order to better have distributors and the suppliers of all sizes grow alongside with Tuniu.

During the third quarter of 2018, revenue of Tuniu's TMC business increased 120% year-over-year. Small to medium enterprises in first tier and second tier cities were the main driver for growth.

We will also expand into larger enterprises based in third and the fourth tier cities to continue maintaining our growth momentum and diversifying our customer base. Now for our service network, we continue to make excellent progress in expanding coverage and the service quality.

During the first three quarters of 2018, our local tour operators cumulatively served more than 650,000 organized tour trips. Domestically, GMV generated by our local tour operators increased by more than 150% year-over-year during the quarter. Internationally, Tuniu has also launched international car services in number of major destinations.

As we continue to spread the coverage of our service network, both domestically and internationally, Tuniu will be able to better engage with customers at the destination and ensure we have higher quality travel experience.

To further serve our customers, we have made strong strive in creating first and last mile transportation solutions for customers in lower tier cities. We have introduced a number of transportation services, such as bus or car pickup services that can be bundled to various travel products.

This increases the effective coverage of all along our products to nearby lower tier cities. This is a major breakthrough solving a tough problem that has previously limited the amount of coverage in long tier cities. Overall, Tuniu put the customer experience at the highest priority during the implementation of our strategies.

We continue to refine our sales network so that we can further simplify our customers' booking experience across each channel. We also continued to improve our service network to ensure our customers are served with higher quality products and services.

By focusing on these two networks, we are able to provide our customers complete online and offline experience from the moment they start browsing for their next trip all the way until they return from their trip. We believe our attention to the customer experience will differentiate Tuniu from our peers and be the driver of our growth in the future.

As Tuniu continued to execute its cost strategies during this quarter, we face the challenges including external factors impacting certain destinations and the economy factors such as the exchange rate.

However, we believe the continuous execution of our cost strategies will allow Tuniu to capture the future of China's online leisure travel market as Tuniu continues to diversify itself with new channels and drivers of growth, while growing to improve its efficiency for increased profitability.

I'll turn the call to Maria Xin, our CFO for the financial highlights..

Thank you, Donald. Hello everyone. Now, I will walk you through our third 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 third quarter of 2018, net revenues were RMB763.1 million, representing 5% year-over-year decrease. Revenues from packaged tours were up 5% year-over-year to RMB632.7 million and accounted for 83% of our total net revenue for the quarter. The increase was primarily due to the growth of organized tours.

Other revenues were down 35% year-over-year to RMB130.4 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 down 11% year-over-year to RMB391.5 million for the third quarter of 2018.

The decrease was primarily due to the decrease in other revenues. Operating expenses for the third quarter of 2018 were RMB395.1 million, down 22% year-over-year, excluding share-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were RMB340.7 million, representing a year-over-year decrease of 23%.

Research and product development expenses for the third quarter of 2018 were RMB78.3 million, down 37% year-over-year. Research and product development expenses as a percentage of net revenues were 10% in the third quarter of 2018, decreasing from 15% in the corresponding period in 2017.

The decrease was primarily due to the increase 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 third quarter of 2018 were RMB209.6 million, down 7% year-over-year.

Sales and marketing expenses as a percentage of net revenues were 27.5% in the third quarter of 2018, decreasing from 27.9% in the corresponding period in 2017. The decrease was primarily due to the optimization of promotional expense to structures and preference of marketing channels with higher ROI.

General and administrative expenses were RMB122.9 million in the third quarter of 2018, down 26% year-over-year. General and administrative expenses as a percentage of net revenues were 16% in the third quarter of 2018, decreasing from 21% 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 income attributable to ordinary shareholders was RMB31 million in the third quarter of 2018.

Non-GAAP net income attributable to ordinary shareholders, which excludes share-based compensation expense and amortization of acquired intangible assets, was RMB86.1 million in the third quarter of 2018. As of September 30, 2018, the Company had cash and cash equivalents, restricted cash and short-term investment of RMB1.9 billion.

In the third quarter, excluding the impact of the payments to Hainan Airline Tourism cash conversion cycle was negative 22 days compared to negative 23 days in the corresponding period last year.

Cash flow generated from the operations for the first quarter of 2018 was RMB37.2 million compared to the negative cash flow from operations of RMB57.7 million in the corresponding period last year. This was primarily due to the increase in net income and improved management of our working capital.

Capital expenditures for the third quarter of this year were RMB34.5 million. Tuniu currently expect to generated RMB422.9 million to RMB446.4 million of net revenue for the fourth quarter of 2018, which represents 5% to 10% year-over-year decrease.

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?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Zeping Zhao with ICBC International. Please go ahead. .

I'm just wondering if management could share the reason of the mild growth of packaged tour business, apart from the Thailand incident.

And if management could share with us some future development of the Tuniu's packaged tour business?.

First, let me expand the growth rate slow down for this quarter and then Donald will give you more color on the further strategy for our packaged tour.

So in this quarter, because of the some external reasons such as the poorly booking in Bali were some external reasons what decreased more than 40% and the Maldives the Islands decreased more than 70%. So this quarter growth rate of the packaged tour will suffer the impact of this.

So we see the fluctuations of our packaged tour revenue growth rate in this year and the impact growth rate of the packaged tour revenue in this quarter will be the lowest level during the whole year.

In the fourth quarter, we may see the growth rate of packaged tour recurring in the fourth quarter they will recover to double-digit present of the growth rate..

So during the third quarter, there has been relatively large amount of external events that is happen to be within this quarter, namely the events in Thailand and Bali Island have negatively influenced our growth. So the effect of external events happens occasionally but the key here for us is to diversify. So this can be seen in a few points.

First, we should diversify in terms of our destination. We are actively developing new places for Chinese people to go. And on direct procurement, we also are trying to emphasize the usage dynamic packaging system.

So this will allow us to better leverage our supply chain and also our sales network so that we could get more Chinese people to travel to different places..

[Operator Instructions] The next question comes from [William Yoon] with Blue Sky Capital. Please go ahead..

Can you give us a bit more color on the development of the offline store? Financially, how will expansions of the offline stores impact our long-term margin in the group?.

So first, I think Donald will introduce the long-term strategy for the offline store and after Donald, I will explain the margin impact in this, going forward..

So far our plans for our offline retail stores happened relatively smooth. We have made excellent progress in opening the stores this year. As mentioned in our opening remarks, financially these stores make a lot of sense.

So stores that are open -- that have been open between six to 12 months are able to cover 100% of total direct operating expense, while stores that have been open for more than 12 months are able to cover even more than that. So on a single store model this makes very much a lot of sense.

But there continues to be a lot of room for us to increase the efficiencies of these stores. And we are actively working with these stores to maximize the user experience. So what we have in mind is almost 2.0 version of new stores and new stores we have better tools to engage with our customers and to create better relationships with them.

And we hope to maximize the user experience there. So by the end of this year, we plan to have approximately 500 stores. Going forward next year, we plan to continue opening more stores. However, the pace will depend. We believe there’s still a lot of upside in terms of how many more stores we can open but we are definitely not in a rush.

So another thing to mention is the model of our stores. So our customer representative in these offline retail stores are very dedicated customer service representatives. They focus on the social aspect and the interpersonal asset. They are able to bond with these customers.

And so the next time these customers have any travel demand, they will come to our representatives first. This works in conjunction with our professional customer service. So they are more -- in-charge of more specific questions about certain destinations, certain products.

So we believe this is a very innovative model and have been able to increase the efficiencies of our offline store. Thank you..

As mentioned for the new stores open more than six months can cover its direct expense. Since this year, we still have lot of new opening stores and we will open another 80 stores in the October and November and December. So for new stores still cannot cover its direct expense and we will continue to open the stores next year.

In the short-term, it will be impact our margins but for the long-term is one of our growth driver. The new customers acquired by our offline stores in this quarter contributed about 15% of our total passenger revenues. It can help us to leveraging other backend expense -- operating expense in the longer term.

And do you have any follow-up questions?.

Can management give some inside on the development to Tuniu directed procurement, also what the current procurement for local tour operators? Will Tuniu continue to expanding the number of local tour operators?.

So in terms of our direct procurement and local tour operators, we had a very solid quarter. During the quarter, 60% of our GMV -- our direct procurement is actually 50% of our GMV. During the quarter, we have a total of 26 local tour operators, of which 22 were based in China and four based internationally.

So with our local tour operator and same with our direct procurement, our focus is to really increase the user experience and to really maximize the future repurchases of these customers. So we want to keep these customers to continue buying products and services here at Tuniu.

So if you look at the market and compare to third-party suppliers, we are much more motivated and incentivized to provide high quality services and to ensure that these customers stay as a long-term Tuniu customer.

So the second part of direct procurement is direct procurement and using our local tour operator effectively increases take rate of our products.

So that’s also definitely very beneficial but to us on a long-term basis, we believe that maximizing the repurchase, making sure that these customers stay with Tuniu on a long-term basis is the most important component.

So in terms of the number of trips, as mentioned in our opening remarks, domestic and international trips have increased hopefully very positively. And also during the quarter, we also introduced a number of local transportation services at international destinations.

We believe this is definitely a positive step as it helps us increase user stickiness as well as increase the coverage of our product, which in the long run will translate into more customers choosing Tuniu when they travel.

Another key point that differentiates Tuniu's local tour operator and direct procurement is our ability to really package a lot of different products together using our dynamic packaging system. So traditionally, most products can only cover the first or second or higher tier city.

However, with our dynamic packaging system and this capability, we are able to effectively increase the coverage of these traditional products from first tier, second tier city, using transportation and to cover these products to even lower tier city. So it seems that’s very similar to our offline retail store.

Similarly, we integrate our local tour operator, our ability to service people with this dynamics packaging system to really differentiate Tuniu from many of our peers within the industry..

[Operator Instructions] The next question comes from Ivy Ji with Credit Suisse. Please go ahead..

I remember that management just commented that the growth of packaged tour is likely to return to double-digit in the coming fourth quarter.

Can management help us to reconcile this with the revenue guidance in the fourth quarter of about 5% to 10% revenue drop year-on-year, so what's the gap between this growth in packaged tour and to revenue growth? And also can management share with us some of your thoughts about the growth of packaged tour and the overall outbound into next year, please?.

Yes, for the fourth quarter's guidance, so we see the recurrence of the packaged tour revenues but the impact of our other revenue still continues in the first quarter.

The performers in the first quarter for other revenue is similar as third quarter as we are restructuring our financial business and most stricter insurance bundling requirement impact our other revenues. So we have other revenues that will grow negatively in the fourth quarter..

The next question comes from [Elaine Yi], Private Investor. Please go ahead..

I was wondering if you can share with us more details on the revenue breakdown by destination for this quarter. Thank you..

I will give you more details and the breakdown by destinations.

So in the third quarter, domestic tours contributed about 30% of the total packaged tour; and Europe currently is the largest destination and above 18% in this quarter; Japan and Korea together, mostly from Japan 9% in this quarter; Southeast Asia 8% this quarter; and the cruise line, about 6% to 7%.

Other destinations such as Islands and Maldives, the contribution decreased from other quarters in this quarter, less than 5%..

We are now approaching the end of the conference call. I would now like to turn the conference over to Tuniu's CFO, 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..

Thank you for participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day..