Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Jade Wei, Senior Director of Investor Relations of the company. Please go ahead, Jade.

Thank you, Christian. Good evening and good morning, everyone. Welcome to NIO's fourth quarter and full year 2018 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have in Beijing, Mr. William Li, Founder, Chairman of the Board and Chief Executive Officer, and in Hong Cong Mr. Louis Hsieh, our Chief Financial Officer and Mr. Nick Wang, our VP of Finance. Louis and Nick will begin with prepared remarks and William will join for the Q&A session. Before we continue, please be kindly 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 the certain filings of the company with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and its conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO's press release which contains reconciliation of unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn this call over to our CFO, Mr. Louis Hsieh. Louis, please go ahead.

Thank you, Jade. Hello everyone. Thank you for joining us today. We are pleased to report our fourth quarter and first full year results as a public company. Our results reflect broad based accomplishments across our organization and provide us with a strong base for moving forward in 2019. I'll begin with some highlights. In Q4 2018 production continue to ramp for our NIO JAC manufacturing sites and we delivered 7,980 ES8, during the quarter to bring our total deliveries to 11,348 units for 2018, which helped strengthen the ES8 brand and solidified our leadership position among premium electric 7-seater SUVs. Revenues increased 134% sequentially from the third quarter and total revenue reached RMB 4.95 billion for the first year following our initial deliveries in June 2018. In December 2018 we launched the ES6, our 5-seater high performance premium electric SUV as well as the 6-seater ES8 version, with 7 passenger SUV in the past now we have a 6-seater version. These launches exemplify our focus on continued market penetration to enhance products and services. We remain confident in our growth prospects in the coming year. We expect a greater than anticipated sequential decrease in deliveries in the first quarter of 2019, partially due to accelerate deliveries made in the end of last year in anticipation of EV subsidy reductions in China in 2019. Number two, seasonal slowdown surrounding the January 1, and Chinese New Year holidays. Number three, soft macroeconomic conditions in China, particularly in the auto sector. As a result, we expect ES8 deliveries in the first quarter to total between 3,500 and 3,800 units. And we have completed 1,805 and 811 deliveries in January and February respectively. In 2019 - by the end of February 2019, we had over 4,200 orders for ES8 with RMB 5,000 deposits…

Thank you, Louis. As Louis mentioned, we concluded 2018 on a strong note. I will now go over some of our financial results for the fourth quarter. And to be mindful of the length of this call I encourage listeners to refer to our earnings press release, which is posted online for our full years and other additional details. Total revenues in the fourth quarter of 2018 were RMB 3.44 billion or $499.7 million, representing an increase of 133.8% from the third quarter of 2018. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the fourth quarter of 2018 were RMB 3.38 billion or $491.8 million, representing an increase of 137% from the third quarter of 2018 and accounted for 98% of total revenues in quarter. The increase in fourth quarter vehicle sales over the third quarter of 2018 was attributed to accelerate deliveries of ES8 in quarter. Other sales in the fourth quarter of 2018 were RMB 54.4 million, or $7.9 million, representing an increase of 27.5% from the third quarter of 2018. The increase in fourth quarter other sales over the third quarter of 2018 was mainly attributed to increase the revenue recognized from the home chargers installed and service provided in the quarter. Cost of sales in the fourth quarter of 2018 was RMB 3.42 billion or $497.7 million, representing an increase of 115.8% from the third quarter of 2018. The increase in cost of sales over the third quarter of 2018 was mainly driven by the increase of delivery volume of ES8s in the quarter. Gross margin in the fourth quarter of 2018 was positive 0.4% compared with negative 7.9% in the third quarter of 2018, mainly driven by the increase of vehicle margin in the quarter. Vehicle margin…

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Your first question today comes from the line of Dan Galves from Wolfe Research. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions. I was hoping that you could talk a little bit about your expectations for the government EV subsidy policy. In 2019 when do you expect this to be announced? What are some of the positives and negatives? Will your the bigger 84 kilowatt hour battery help offset some of the reduction? And finally, do you expect more cities in China in 2019 to put restrictions or quotas on internal combustion vehicles?

Thank you, Dan. William, do you want to answer this question?

Yes, I can. So thanks for your question. I will speak in Chinese and Ruohe will help me to translate. Right now we haven't received any official announcement from the government regarding the subsidy policies in 2019. And we expect that it will be announced officially recently. For the overall direction, we - although we haven't received any official announcement we believe that compared with last year the subsidy policy in 2019 will be decreasing significantly. But if we look at the positive side as mentioned by the Chinese Government yesterday they will be keeping supporting NEV's development especially the support in terms of the taxations for the NEV especially for the pure electric vehicles there is no need to pay the purchasing tax for the buyers. And we believe that this support in the taxation will be continued. And we also believe that the advantages of the consumption tax on the electric vehicle will also continue. And for NIO our product positioning taps into the premium segments, compared with other entry level brands and models. We will receive very limited effect from the decreasing subsidy, and on the other hand we do receive a lot of advantages with the taxations. So in the long run we will be in the advantageous position. And another advantage of decreasing subsidy is that before we will deduct - before we have to deduct the subsidy for our users and we need to wait for the subsidy from the government. And it takes a very long time to wait for the subsidy from the government. And we need to pay some advancement payments and after the subsidy decreases actually we will receive - since we’ll receive more advantages with the taxations actually it will help us to release the pressure of the cash flow. And in the long run, I believe that the Chinese policies will be supporting the EV's development. And I have this thought from two perspectives. The first is that there will be a lot of the benefits in terms of the use of electric vehicles. For example, the EV can drive freely in Beijing and in Shanghai we have advantages with the license plate applications of EV. And I believe that more cities will be enacting this kind of EV friendly policies in the future. And secondly, we do receive a lot of benefits with the taxes. And for NIO as we are a premium brand, I believe this will help us to expand our market, especially we can take up the market shares of users who used to be the ICE car users. So all sum up in the short-term, especially in the second quarter this year we will be facing some pressures, but the pressures on ourselves is much lesser than the pressure on other electric vehicle companies. And in the long run, we believe that we will keep receiving the benefits and advantages from the policies and this will help us to expand our market.

Thank you, William. Dan also as far as your other question, Hainan Island has no inactive restrictive license plate restrictions. So Sanya and Haikou are also joining that list. So we expect many more cities in the next in the coming years to restrict the ICE license plates in those cities to prevent pollution and to move toward electric car future.

Thank you.

Next question?

Your next question comes from the line of Ryan Brinkman from JP Morgan. Please go ahead.

Hi. Good morning. Thanks for taking my question. I would like to explore a bit more the implications of not building the wholly owned assembly plant in Shanghai. Presumably this could have a very positive implication for return on invested capital. Could you talk to about the potential impact on earnings relative to pursuing a wholly owned - relative not pursuing a wholly owned approach? And then is there anything to think about, about the potential timing of expected future models? Does this development have the potential to either delay or perhaps even accelerate the timing of one additional model might launch beyond the ES8 and ES6?

Okay. Thank you Ryan. This one I think I'll let William answer this. He's the most familiar with the plant situation. William you want to go?

Okay. Thanks for the question. As we all know last November the MIP has enacted a very important file called No. 15 file and in this file it stated that the Chinese Government endorsed the cooperation between the car R&D companies like NIO, with the existing manufacturing companies or manufacturing plants that means that the cooperative mode between NIO and JAC is endorsed by the Chinese Government. Of course a lot of details regarding this document still need to be finalized and we expect that on the 1st of June, the details and this document will be finalized officially and it will be opening for the applications and approval procedures. And the advantages for NIO is that first of all we don't need to apply for the subsidies or the carbon emission credit, via JAC we can directly apply this from the government. And secondly for NIO as an independent car companies, we can manage our products very well and this will be helping us with our long-term strategic planning. And we receive a lot of benefits from this and with this we can review and replan our investment in the manufacturing and we can also improve the management efficiency of manufacturing. So in the long run we will be upholding this manufacturing cooperative mode. At the moment JAC is our only manufacturing partner and in the future in the long run, we may embrace other partners in this regard and this will also be important part of our long-term strategy. And currently because last year, during the second half of last year we have modified our production lines for both ES8 and ES6 production and now the annual capacity of NIO JAC manufacturing site is about 100,000 units per year. And recently we'll be having some discussions with JAC…

Okay. I think based on this change of the strategy, I think it's definitely going to be some short-term and mid-term saving on CapEx sending for sure. And over long run, we believe that this can translate into a long-term higher return on asset as well.

Okay, thank you.

Thank you, Ryan. Next question?

The next question comes from the line of Nick Lai from JP Morgan. Please go ahead.

Hi. Good morning, William and Nick and Louis. Thank you for taking my question. Just one very simple question regarding the pricing strategy, can we talk about our long-term pricing, our medium term pricing strategy considering two moving parts or two moving factors, one is subsidy cut and second is potential localization of model three in first quarter? Thank you.

Okay. Thank you, Nick. William, do you want to talk about our pricing strategy?

Okay. And we'll be committed to adopting a more reasonable pricing strategy instead of just to reduce the price to take up the market share. And for ES8 and ES6 we have battery leasing package or policy, which means that user can get RMB 100,000 reduction if they chose this battery leasing service. And they only need to pay the monthly fee. And from the number perspective over 70% of our ES8 users have chosen this battery leasing service. So in this regard, for ES6 users, they only need to pay about RMB 258,000 before subsidy and they don't need to pay the purchasing tax. And from the pricing perspective, our product can be very competitive in the markets. And we understand that our competitors had several rounds of price reductions recently. They may be facing some competitive pressures so they need to reduce this price. But I believe or I think this price reduction can damage the brand image and the loyalty of their existing users and consumers. And in the long run, NIO will not tap into - NIO will not try to take up a bigger market share by simply reducing the price. Instead we want to innovate our service mode to improve our user satisfaction and user loyalties and then we can improve our sales and market share. So I believe with our pricing strategy and battery leasing service, as well as the innovations with our service mode, we can keep our competitive edge in this market. And for this year to improve our brand awareness and market penetration, we will be hosting some test drive events or user experience events so that we can touch upon more users.

Thank you, William. And Nick, I think in my view, the Tesla price reductions it is my opinion I think is impart directly because NIO is already - our ES8 are selling Tesla's top brands S and the X which is why price reduction was so significant, 15% to 20% is huge. And on Model 3 I think Model 3 is the base version which doesn't even compare close to our ES6 in performance or range is over RMB 400,000. As William just said ours just 258,000 if you take the battery lease options to start with. So I don't think it solves the competitive problem for Tesla in China.

Yes, thank you William and Louis. I was actually - if we plan to release MSRP but thank you for the answers. Thank you.

So ours is 358 theirs is about 410 the cheapest version. But the Model 3 is the small car it's not even the same class, it's a smaller sedan. It's like comparing 318i BMW, ours is more like an X5 the ES6. Our range is 510. Their range is about 300 kilometers. Our acceleration is a second faster than theirs, got to 60 in 4.7, theirs like 5.7 or 5.8. Theirs have a single motor, ours is dual motor. So it's not comparable.

Indeed. Thank you, Louis.

Thank you.

Your next question comes from the line of Vincent Ha from Deutsche Bank. Please go ahead.

Hi. Thanks management for taking my questions. I have questions on two areas. Number one is on the longer term counts of sales outlook. We noticed that the company is giving a more conservative guidance for first and second quarter. But does it really change our longer term expectation of around like 40,000 to 45,000 deliveries for the full year 2019? And what would be the split between ES6 and ES8? And then a little bit follow up on the sales outlook. We recently saw a really positive documentary coming off from the 60 minutes of CVS. And I think that really helps to raise the awareness of the brand inside China. I wonder whether the company is trying to leveraging on these publicity to help on the sales and help the traffic in the NIO houses. My second question is for the fundraising. Now congratulations on the successful like convertible notes raising last month. And my question on this one is that, can we have a rough idea of what is the cost for the options for the insurance? And then the second question, is that going forward is this likely to be the major way of further fundraisings in future? So those are the two questions. Thank you.

Thank you, Vincent. This one I'll take the numbers question. The understanding is our forecast has not changed for 2019. As we said the slower than expected start in Q1 and Q2 will partly be due because the subsidy is normally announced in January in China this year it's already March. It hasn't been announced. So that uncertainty and we said the macro. The other thing is don't forget in February is only half a month because Chinese New Year took up the first 10 days of holiday. We had some delivery delays in February due to the - getting license registration offices open in China. So the 811 is exceptionally low. So we expect a pickup in March of this year. And as I said, we have over 4,200 orders for ES8 that are in the bag 5,000 and 45,000. 1,300 of them are for the 6-seater version of the ES8. The 6-seater version won't be available until Q2. So it's not the slowdown as it is pronounced as it looks from the numbers. So I appreciate that question, Vincent. On the 60 minutes article it's great publicity in the U.S. and outside, unfortunately 60 minutes isn't shown in China, but is a very positive view of Williams strategy and vision for the company. On fundraising, the convertible bonds had - premium is a little bit higher than we like this coupon is 4.5% is a five year CB with three year put. I don't think CB will be the primary source of fundraising for us in the future we have many other sources of fundraising. We have enough cash to launch ES8 and ES6, but as you know because of a car company's nature we will need to tap the capital markets at some point in the future. We also have credit lines available to us, we have a lot of strategic interest in investing in NIO through partnerships and others and also we have the ability do credit financing on the battery lease receivables we get in others to generate a significant amount of cash by - from our battery leasing and other revenues. You want to talk about fundraising more?

Yes, actually there is two points I just want to add on top of what Louis just mentioned, essentially you're asking about the structure of the CB. In this transactions I think there are two elements of the derivative financial structure and derivative nature one is a capital upper straight that's basically shows the management the company's confident over the long run, especially the high appreciation of stock price that's basically - in that the elements that basically increased our straight price from 27.5% to 100%. The other element that as we call it a zero straightforward shares essentially allow the company to purchase back some shares and make this shares lendable to the potential that CB investor in the marketplace. There's a typical practice in the market, in the CB market. Okay.

Thank you. Does that answer your question, Vincent. Basically our forecast remains unchanged there may be slightly more ES8 orders since we already have 7,300 three or four months before launch. So we think that's a very strong number. And then ES8 I think will - Q2 should be better than Q1. But I think our ES8 is already the number one selling premium EV in the market already. So it's already out selling the Model X by a wide, wide margin. So it’s basically already the market leading position. Next question.

Your next question comes from the line of Fie Fang from Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking our question. It is very impressive to see the ramp up of ES8 volume and your brand. Can management talk about the operational lessons that you have learned from branding ES8? What have worked, what have not and would you plan to do differently for ES6 and the third model? And also for ES6, how do you think about the cannibalization risk with ES8?

Thank you, Fie. William do you talk about lessons you've learned from branding ES8 and any cannibalization against ES6, with the ES6 cannibalizing ES8.

Yes. Thanks for the question. ES8 is our first product and from manufacturing to delivery in terms of the readiness of supply chain, quality and software we need to improve a lot. And for the past six months, we've experienced a lot of challenges. And some days we need to manufacture at least 100 or 200 cars and we need to deliver that many cars every day. And this is a huge pressure for us. And I got to say we have overcome that period of time, and I will appreciate our team for this great contribution. And as of today, we've delivered cars to 270 cities in China. And the geographical distribution of our users is quite wide. We even have users in the Northeast China, which is one of the coldest areas in China. And which means that we also face some pressures with our service. I cannot say this is a lesson learned, but for the last quarter - for the first quarter last year we do paid a lot of attentions with the user experience. For example, to guarantee a smooth car usage and experience in the winter we spent a lot of time with the user services in these areas. And also because we didn't want to keep our users waiting for such a long time, we have some intensive user deliveries. And for these - for what we got from past quarter we think we can further improve our efficiencies with the services and service operations. And I believe this will be a long-term target and this will help us to further improve our user satisfactions. And starting from this year, we believe that NIO has entered into the second phase of a competition we call it the qualifying round. And the priority of this round is that we need to improve our operation efficiency without compromising on the user satisfaction. This is one of the most important tasks at the moment.

Thank you, William. Also I think in my view ES6 will - obviously will have cannibalization effect on ES8, but I think that's normal. They're both SUVs one is 5-seater, one is 7-seater. But I want to remind you that the 5-seater version, 5-seater SUV market is many times bigger than the 7-seater SUV market, which is very limited in China. So I think as the potential for ES6 is much larger in orders and is reflected in our half year forecast than ES8. So I think it's inevitable.

Actually Louis has mentioned one important information, the market size of the premium 5-seater SUV is 10 times bigger than that of premium 7-seater SUV, which means that the total volume of the 5-seater SUV above the price of RMB 300,000 is over 1 million units. But that's also ES - that of 7-seater SUV is only about 100,000 units. And we care a lot about our overall market share instead of just for ES8 or ES6. And for ES6, our target this year is to let more people to know this brand, to know this car and to try this car. That's why this year we are planning for a wide range of test drives around China so that more users or more potential users can have a try. And for our existing users who tried or drove ES8 for a while actually the feedback is quite positive, because we understand the demand and the needs of the Chinese users and we are confident about the product we provide to them. And actually NIO has one of the highest user satisfactions and we also keep - want to keep improving this user satisfactions. If you read some self-generated content on the social media they have some attractive titles criticizing about NIO's services, competitiveness or our product. But if you look at the real user feedback, you will find that the feedbacks from our users are quite positive. And in the long-term, I believe this is a foundation to our future competitiveness.

Thank you, William. Next question?

Your next question comes from the line of Paul Gong from UBS. Please go ahead.

Yes, sure. Thanks for taking my question. My first question is regarding your strategy. After this subsidies declined. Say, how much percentage you could pass this shortfall to your customers or you plan to pass? If the subsidy declined by $100, how many dollars do you expect the customers might pay as an extra to make up this short fall?

William, you want to talk about the subsidy effect on our pricing, the forms of subsidy or if you want me to do it?

There are two types of - do we need translation, sorry. There are two types of subsidy, one is national subsidy, one is local subsidy. Actually it is not very easy for some users in some cities to get local subsidy already. And as for the subsidy declined or reduction, if the subsidy decline by RMB 1 actually user need to pay for that RMB 1. So there is no plan to adjust our price because of this subsidy reduction, which means that if the national subsidy decreases by RMB 10,000 this year, the users need to pay RMB 10,000 more. And before we receive the official announcement of the subsidy policy this year, actually even if the subsidy policy of this year is released, there is no plan to reduce our price to cover the short fall.

To add to that, I think our prices is already for the price and value performance ours is really the best in the market with ES6 and ES8. And that's why I think in my view, that's why Tesla has been aggressively lowering their price, because of their market share losses to NIO. And so, I think there is no reason for us to take down our price. The subsidy will keep our margins in place. And also with the 3% reduction in VAT tax, that should help our gross margin significantly. So I think the government policies are actually quite positive for us.

Okay, thank you. Yes, my second question is regarding the ES6 orders. I heard it was 7,300. How does this compare to the ES8 orders at the same stage? Say, at the same time last year, what was the cumulative ES8 orders, can you share with us?

Yes. I think ES8 at that point was a little bit better, because it was the first time NIO had all this hype for the whole year and it was a big event. So NIO ES8 orders were about 10,000 at this time. But don't forget ES6 we haven't start - I mean we haven't started the marketing campaign, yet. This is mostly the referrals, word of mouth. So you'll see us in April when the Shanghai Auto Show takes off, as William had mentioned having a lot more marketing on ES6. In addition, part of the reasons our cost are high for Q4 than Q1 is we are building a lot of ES6s to be available in May for test price. That's one thing we learned about ES8 is that we didn't have enough cars for people to test drive, it is very hard to test drive a car. And now we have NIO houses in 27 cities. So we're going to build - so there will be a cost in Q1 to absorb the cost building a lot of ES6s a lot of test drives. When people drive our ES8, the majority of them will buy that car, vast majority of them. We did ES6s even better because the lighter sportier version of the ES8 it drives phenomenally. So we believe that once we start allowing test drives the order number will go up quite fast in the May June timeframe.

Actually ES6 and ES8 focused on different market and user groups. For ES8, it's tapped into the premium 7-seater SUV segment and in that segment we don't have many competitors. And also ES8 represents the first official debut and product launch of NIO and a lot of users who are not potential 7-seater SUV users bought our cars because they love NIO brand, that's why we receive more orders than ES6 at the early stage of ES8 product launch. And for ES6 the market situation is different it taps into a bigger market, but at the same time the competition is fiercer. For example we have Q5, GLC, X3 in this market segment and their sales volume every month is over 10,000 units. But we are also very confident with our ES6 performance, user experience, the advantages with the taxes and the innovative services and we believe we can keep this competitive edge in this market segment. We already expected that the early stage of ES6 order is not as good as ES8. That's why as Louis mentioned, we will be holding large scale test drive campaigns and the marketing campaigns starting from May, and we believe that in this bigger and more competitive market segment ES6 will be very competitive compared with traditional ICE cars.

Thank you, William. Next question?

Your next question comes from the line of Bin Wang from Credit Suisse. Please go ahead.

Thank you. I actually have three operation questions. The number one is about the NIO House number I noticed that right now is 27, so we have been guiding is about 70, but end up this year. So I want to know whether you have any change about the plan for NIO House number. That's number one question. Number two is about the Tesla actually. Now we have localized the Model Y next year. Can I assume the ES6 compete with Model Y, because Model Y has been set at 10% bigger than the Model 3. Since that will compete with Model Y so I want to know whether it will compete with Model Y meanwhile because the Model 3 have a such a big success in the U.S. do we have any plan to introduce a similar model than the Model 3 for NIO in the future say 2021? And the third question is about the software, one of the key things is about the, so far our ADAS have still not fully been utilized because of the software, you have been guiding software maybe ready in the May year. So can we have update about the software when will it be fully ready to have a much better user experience. And lastly I also have a question about battery, since the ES6 have better battery, can we know when is the battery can be used I mean the same 811 battery can be used to ES8 and when will be used, if at use will the price offer ES8 will be increase or not? Thank you.

Thank you, Wang Bin. I'll take one at a time. On NIO Houses, we currently have 13 in 11 cities and 16 pop-up NIO Houses. We wanted a large footprint as we launch ES6 and because of the dispersion of the ES8 orders across the cities. We won't - you won't see us go to 70 cities this year. So, we realized that the expenses are high. So we are controlling the expenses, so you'll see high expenses in Q1 and then we should see a gradual decline, significant decline and expenses in Q2, Q3, and Q4, as we march toward profitability. So it's number one, we think we have pretty good coverage in the 27 cities we may add a few more, but it won't be a large-scale expansion into 70 cities this year. Second, Model Y, Model Y was supposed to be some kind of announcement next week. I don't worry about it, because it won't be here for a year or so in China, if even then. It should be 10% bigger than the Model X as what they say, it's closer to ES8. But is a Model X - Model 3, so the Model 3 is 400, the cheapest version RMB 420,000, is 10% more that means the Model Y will be over RMB 500,000 when it comes to China in a year or two. And that will still not be as price competitive with our ES6, which is RMB 358,000. And that depends on whether you get one motor or two motors in the Model Y. So I think is our ES6 will compete very well, it should be a slightly bigger, it'll be X5 versus X3, which is what I think the Model Y will be comparable to. So I think our car is…

There are no questions at this time. I'd like to turn the call back over to the company to closing remarks. Thank you.

Okay. Well, thank you everyone for joining us today. We - from William and Nick and Jade and Heather and I and Stanley here in Hong Kong and Beijing. We thank you for your time. We look forward to seeing you in the future calls. Thank you.

Thank you everyone.

This concludes this conference call. You may now disconnect your line. Thank you.