Hello, ladies and gentlemen. Thank you for standing by for Li Auto's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Good evening, and good morning, everyone. Welcome to Li Auto's First Quarter 2024 Earnings Conference Call. The company's financial and operating results were published in our press release earlier today, and are posted on the company's IR website. On today's call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our President, Mr. Donghui Ma; and our Senior Vice President, Mr. James Liangjun Zou, will join for the Q&A discussion. Before I continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward-looking statements, except as required and applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial matters. Please refer to Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CEO will start his remarks in Chinese there will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Interpreted] Now translating for Mr. Li. First, I'll begin with a review of Li Auto's first quarter performance. In the first quarter, we delivered over 80,400 vehicles, up 52.9% year-over-year. According to China Automotive Technology and Research Center, the NEV market priced over RMB 200,000 grew by 24.8% year-over-year during the first quarter. While our growth rate far exceeds that of the market, making us the leader among all premium NEV brands. Driven by the vehicle delivery growth, our total revenue for the first quarter reached RMB 25.6 billion, a year-on-year increase of 36.4%. Our gross margin for the first quarter remained healthy at 20.6% despite the launch of Li MEGA, the changeover of the L Series and the following price adjustments. In the long run, our robust balance sheet with cash reserves of over -- of nearly RMB 100 billion will continue to support us to focus on user value creation and firmly invest in R&D as we continue to offer products and services for families that exceed their expectations. Nevertheless, we have admittedly encountered multiple challenges since the start of the year from both internal operations and changes in the external environment. Our performance this quarter fell short of our expectations made at the beginning of this year. In response, we immediately took action and swiftly implemented adjustments across our business including an organizational restructure and workflow optimization. We're confident that these initiatives will enhance our internal operating efficiency and improve the quality of our decision-making going forward, allowing us to focus more on creating and delivering user value. Turning over to products. We released Li MEGA on March 1, our first HPC BEV model and a high-tech flagship MPV for large families, built on our latest 800-volt battery electric platform and equipped with Qilin 5C battery, Li…

Hello, everyone. I will now walk you through some of our 2024 1st quarter financials. Due to time constraints, I will now address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the first quarter were RMB 25.6 billion or USD 3.6 billion, up 36.4% year-over-year and down 38.6% quarter-over-quarter. This includes RMB 24.3 billion or USD 3.4 billion from vehicle sales, up 32.3% year-over-year and down 39.9% quarter-over-quarter. The year-over-year increase was mainly attributable to higher vehicle deliveries, partially offset by the lower average selling price due to the different product mix and pricing strategy change between the 2 quarters. The sequential decrease was mainly due to decreased vehicle deliveries, which were affected by seasonal factors related to Chinese year holiday and lower the expected order intake in March. Cost of sales in the first quarter was RMB 20.3 billion or USD 2.8 billion, up 36.1% year-over-year and down 36.3% quarter-over-quarter. Gross profit in the first quarter was RMB 5.3 billion or USD 731.9 million, up 38% year-over-year and down 46% quarter-over-quarter. Vehicle margin in the first quarter was 19.3% versus 19.8% in the same period last year and 22.7% in the prior quarter. The vehicle margin remained relatively stable year-over-year. The sequential decrease was mainly due to lower average selling price as a result of pricing strategy changes in the first quarter and true-up adjustments of warranty reserve in the prior quarter based on updated estimate of cost of future claims. Gross margin in the first quarter was 20.6% versus 20.4% in the same period last year and 23.5% in the prior quarter. Operating expenses in the first quarter were RMB 5.9 billion or USD 812.9 million, up 71.4% year-over-year and down 13.1% quarter-over-quarter. R&D expenses in the…

[Operator Instructions] Your first question comes from De'an Wang with Deutsche Bank.

[Interpreted] The first question is about volume. Basically, your guidance second quarter will be 105,000 units and 110,000 units, which means the second half you need to sell 360,000 units, which means monthly volume will be close to 60,000 units. Because MEGA volume was quite small and [indiscernible] will be late. So, just [indiscernible] the monthly volume will go to 60,000 units [indiscernible] challenge. So, if you have some pressure to achieve this number, would you further revise on the [indiscernible] volume target. My second question is about gross margin. Previously, you guided the full year gross margin will be 20%. If you want to maintain 20% gross margin after pricing cut, what's the key driver for the margin? Is it because the volume increase when the monthly volume go to 60,000 units or other driver for maintain at 20% gross margin.

This is James. I will take your first question. First of all, the L6 series has been widely recognized by users, for its product strength and price point. And during the initial sales period from 18th April to May -- to 5th May, the accumulated orders of L6 reached over 41,000 units, which was excellent sales performance. The order intake of L6 Series has maintained strong growth momentum post the initial sales period. Additionally, after we implemented the new pricing strategy for Li Auto L7, L8 and L9. Their order flow has also showed ongoing improvements. In summary, our sales momentum has gradually improved, and we are optimistic about the continued ramp-up of the monthly sales going forward. And I will hand over to our CFO for the second question.

Our follow-on. I think to us, the most important part after Q1's challenge as [indiscernible] mentioned, especially after March 1st. I think the most important part at the current stage is sales recovery. I think this also everyone's primary concern and the company. And as we all know, the auto industry has a significant economy upscale. So as our sales can come back, I believe the gross margin pressure will be somehow released. So -- and also with the L6 additionally, upside the sales growth, product mix optimization will be [indiscernible] can impact our gross margin. And as we implemented along the several actions to control organization [indiscernible] which will help the market cutback, and that to remind you, I think we faced those challenges since March. So the second quarter will be the most difficult for the company in this year.

Your next question comes from Tim Hsiao with Morgan Stanley.

[Interpreted] So just want to follow up regarding the sales volume because as management just mentioned, the competition in China, the market has been getting worse year-to-date. Although Li Auto just launched 2024, [indiscernible] L6 and also had the reasonable price adjustment. What would be the company's strategy to further boost the volume front here? You say sales stay suppressed? Would the company ever consider to upgrade the spec or further the cut prices to provide the actual impacts to the sales volumes into the second half, not just to L6, but also to the L7, L8, L9 and the battery EV, pure EV into second half. So that's my first question.

[Interpreted] First, in terms of pricing strategy, in fact after the price adjustment in April, we received consistent feedback that the current pricing is very competitive in the market, and it's also been very well received by our customers, has shown in continued order intake growth since April. So we don't have any further plans for price cuts. In terms of gross margin, we always believe that as -- for a healthy company, sales and gross margin are the 2 most important operating metrics. And as a company as a 9-year-old car company, Li Auto has continually hold ourselves against these 2 important metrics.

[Interpreted] So my second question is about expenses. So based on Li Auto, the updated sales target for 2024 and '25, what would be the reasonable sizes of employees, sales networks and sales and marketing expenses as well as R&D spending. And when will the benefit of cost savings be manually reflected in Li Auto's financial? That's my second question.

This is Johnny. I think given the new year new sales growth target, the company has adjusted very quickly in the last less than 2 months to adjust resource allocation across various attacks, to better align with this year's operating objectives just as we have just mentioned, we focus a lot on operating frequency. I think you had read that in the last 4 years of operation of the company. We expect this adjustment will have some initial impact on the results starting from Q2. Most of them will impact the operating efficacy after the second quarter.

So our next question comes from Tina Hou with Goldman Sachs.

[Interpreted] So my first question is in terms of the new store sales network expansion plan. So previously, we had a target of 400 new stores this year. So just wondering, now with our new strategy, what is the target number there? And also, among the stores, what's your split between the city center stores as well as like city, maybe suburban stores. And in terms of different city tiers, what is your consideration there?

Tina, this is James. I will take your question. So regarding our store expansion plan, and we will -- first of all, we will plan our sales and service networking advance according to sales demand, while expanding our sales network in tens of quantity, we will also continuously optimize the quality of each retail store by offering more showroom vehicles and improving the store space, considering we now have more and more different models. So this year, we have already opened 43 new retail stores with more than half of them having the capacity to display over 9 showroom vehicles. In the meantime, we have closed some smaller ones. As of 19th May, the number of total retail stores reached 488. So this is the latest number. And by city tiers, as you just asked, we have achieved 100% coverage of all first-tier cities, new first-tier cities and the second-tier cities, and 89% coverage of third-tier cities. We also had 215 showrooms across the country to broaden our coverage of more cities, which help us to penetrate to the Tier 3 and Tier 4 cities, aligned with our new sales target, we are gradually changing our pace of market penetration in order to better suit the current business needs. As to the store, types for our new stores, we have gradually increased the proportion of stores in automotive parts, over the past year. In the long run, we will continue to increase the percentage of stores in automotive parts as we expand our model portfolio and improve our brand awareness and influence.

Your next question comes from Yingbo Xu with Latex.

[Interpreted] So I have two questions. The first one is about autonomous algorithm and the difference of this algorithm and how we see the future of this autonomous thing? The second question is about product. How we plan for the pure EV product later this year and next year?

[Interpreted] First of all, on the question regarding city NOA. There are three major paths in this area. Completely dependent on HD map, partially independent and some were independent of HD map. And obviously, a completely independent solution is the most difficult path because it doesn't rely on the coverage and update frequency of high HD maps as well as there's navigation coverage, city NOA can work. So our plan is to release completely independent, HD map independent AD Max solution to all users in Q3 this year for city NOA. And fundamentally, fully independent solutions is real artificial intelligence in terms of autonomous driving, and it uses data-driven model to mimic human behavior and in place for completely rule-based solutions. And Tesla's concept of end-to-end big model is similar concept driven by data-driven model solution. It's very easy to reach consensus on this conceptual solution, but to implement it requires a lot of data and computing power. And this is not something that all car companies are capable of or have the resources of achieving. Therefore, we believe that different companies will like one of those three solutions based on their current situations and capability and resources. And these different choices will result in different products and user value creation.

[Interpreted] The second question on our later BEV products. First of all, we will not be releasing our BEV SUV later this year. The latest plan is to release in the first half of next year. And for two reasons, the first reason is, we believe in order to sell premium BEV SUVs, a necessary requirement is to enough branded charging stations. We believe a correct level is to get similar levels of Tesla in China. That would be the perfect timing for releasing our next BEV product. And secondly, another constraint is the number of parking spots in stores, instore parking spots to display stock. And this is very critical for us to be able to sell multiple cars across multiple price points and to supply a consistent sales of over 10,000 units per model. And in order to achieve that, we need an additional 500 to 600 display spots across the country. Otherwise, we'll be only increasing the number of products rather than the number of sales volume. And that was the exact issue that L8 ran into in the past few months because we decreased the display spots of L8 by 40%. But that is being recovered by now, and we are adding more display spots for the L8. So to summarize, enough charging stations and enough incremental display spots are 2 critical and necessary conditions for selling our BEV SUV product. and we believe we'll reach this point in the first half of next year.

Your next question comes from Paul Gong with UBS.

[Interpreted] So two questions for me. The first one is sooner or later, we are going to have the full product line within the BEV. Do you consider building the dedicated brands or channel for the BEV products? The second question is, given the huge cash reserve and the share price performance recently. Will you consider share buyback at some time point?

This is James. I will take your first question. And regarding the BEV and our REV models. So we will stick to our direct sales model in the domestic market. And we will strive to showcase all of our products in our retail stores and showrooms. In the meantime, we have initiated internal discussion on differentiated retail strategy, and we may launch some innovative pilot programs in the future. And we will share additional relevant details in due course. And I handover to our CFO, Johnny, for your second question.

For the share buyback. Currently, we don't have a set plan. And we will [indiscernible] make some assessments based on company's staff and it's position, capital market and other [indiscernible] cash need for meeting.

Your next question comes from Yuqian Ding with HSBC.

[Interpreted] I got 2 questions. The first is to ask about the growth conviction, especially our total addressable market is mainly hinged on the family users that's largely middle class relevant, but it seems to be melting down. So is the growth coming from the increase in TAM or the relative competition versus the other peers offering, but we are seeing above RMB 200,000 above increasing model supply. And second question is whether the company will consider harvesting some low-hanging fruit in the overseas market with relevance to the development -- the domestic market since the pricing and competition is more favorable and the global OEMs are moving marginally towards hybrid, the range extender seems to be a good solution?

[Interpreted] So on the first question, our focus will remain on the market of NEV vehicles priced over RMB 200,000 for family users. And this will continue to be our focus in the mid to long run, because we firmly believe that there's still much to be done in the market in terms of product, and there are many areas where we can improve to better serve our users and create value for them in the long term.

Okay. I will take your second question. And regarding the overseas market strategy. So as Li Auto vehicle models became increasingly popular overseas, we will accelerate the establishment of our aftersales servicing networks in order to provide the best service experience for our overseas users. We will build in aftersales service network in international market where we already have been established the user base. We plan to start our own aftersales network -- aftersales service network in Central Asia and in the Middle East, this year, which is ongoing right now. We will select appropriate dealers for market expansion in overseas countries, and regions outside Western Europe and North America. Given the adjustment of this year's sales target, we will focus our efforts in the domestic market this year, we will share more details in due course.

Your next question comes from Ming-Hsun Lee with Bank of America.

[Interpreted] So recently, media reported company has certain reorganization, and in the future, what is your strategy for your reorganization and what department or what area you will input more resource to develop?

[Interpreted] So in this most recent organizational restructuring, one most important change is we've established a new department called quality operations. And thinking behind this change is to allow our business units to really focus on high-quality decision-making and operating efficiency, instead of focusing on processes and operating these processes. And typically, for an organization change, it takes about 12 to 24 months to see real results. So we think a good time to evaluate would be sometimes in 2025 and 2026.

[Interpreted] So this year, we can see Li Auto's development in NOA is speeding up. So right now, for your client base, how important do you think NOA for your customer base? And after if this open FSD [indiscernible] in China, that at least change consumers' behavior. And in the future, if some auto companies, they don't have NOA functions on the car, are they able to sell [indiscernible]?

[Interpreted] First of all, we firmly believe that NOA makes an easier and more and safer for our users to track. As we've seen in the latest release of our mapless NOA beta version in May, the feedback from the first group of users, over -- they drive over 65% of their total mileage using city NOA. And this penetration rate is a good testament to their -- to widely accepted related version of NOA model users. And in terms of Tesla's FSD v12, we believe that the next stage of competition across for smart electric vehicles, autonomous driving will be a primary reason for our users as they consider in buying cars. FSD v12 after it becomes available in China, we will only make users focus even more on autonomous driving functionalities as well as experience, which will further enhance the importance of the creation of industry standards and the development of the technology in the industry. And again, in return, drive different car companies to invest even further in improving the performance of NOA features.

As we are reaching the end of our conference call now, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Chang, please go ahead.

Thank you once again for joining us today. If you have any further questions, please feel free to contact Li Auto's Investor Relations team. That's all for today, you may now disconnect your lines. Thank you. Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.