Hello, ladies and gentlemen and thank you for standing by for NIO Incorporated’s Fourth Quarter and Full-Year of 2019 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, Mr. Rui Chen, Director of Investor Relations of the company. Please go ahead, Rui.

Good evening and good morning, everyone. Welcome to NIO’s fourth quarter and full-year 2019 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted on the company’s IR website. On today’s call, we have Mr. William Li, founder, Chairman of the Board, and Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, VP of Finance; and Ms. Jade Wei, AVP of Investor Relations. 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 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 this conference call include discussions of the unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO’s press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, go ahead please.

Hello, everyone, and thank you for joining our 2019 Q4 earnings call today. We delivered, a combined 8,224 ES8 and ES6 vehicles in the fourth quarter of 2019, representing a 71% sequential increase from the prior quarter. Cumulative deliveries of ES8 and ES6 reached 20,565 in 2019, representing an 81% increase from 2018. The COVID-19 has broken out in China since January 2020. So overall sales and deliveries of the auto industry in China are materially impacted and the passenger vehicle sales in China slumped 41% in total in January and February 2020 compared to the same period last year. Against this backdrop, NIO has delivered a total of 2,305 vehicles in January and February, which is lower than our target prior to the outbreak. In response to the micro environment, on one hand, we have actively explored a variety of online channels, including live streaming platforms and fully leverage the well developed online functions of new app to promote online sales, new and direct to sales of business process has enabled us to continue our sales efforts during this special time. On the other hand, from Spring Festival to now, NIO has maintained 24/7 maintenance and power services through over cloud based service system to support users of daily usage of our products and the services system have always due to the arduous test during the outbreak and worldwide recognition of over user community. Thanks to our loyal user community and a superior word of mouth reputation. Recently orders generated through user referral have reached 69%, much higher than the 45% average user referral rate in 2019. With the joint efforts of our users and teams, the total number of new production orders reached over 2,100 in the past 30 days, representing 70% of the order growth level in…

Thank you, William. I will now go over our key financial results for the fourth quarter of 2019. As being mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for our full year results and other additional details. Our total revenues in the fourth quarter were RMB2.85 billion or US$400.1 million, representing an increase of 55.1% quarter-over-quarter. Our total revenues are made of two parts, vehicle sales and other sales. Vehicle sales in the fourth quarter were RMB2.68 billion or US$385.5 million, representing an increase of 54.8% quarter-over-quarter and accounted for 94% of total revenues in this quarter. The increase in vehicle sales quarter-over-quarter was attributed to higher deliveries achieved from our existing user referrals and the expansion of our sales network through the continued launch of NIO Spaces in the fourth quarter of 2019. Other sales in the fourth quarter were RMB164.4 million or US$23.6 million, representing an increase of 59.0% quarter-over-quarter. The increase in other sales over last quarter was mainly attributed to the increase of home chargers installed and accessories sold, which was in line with improvement of vehicle sales in the fourth quarter. Cost of sales in the fourth quarter was RMB3.10 billion or US$445.6 million, representing an increase of 50.7% quarter-over-quarter. The increase in cost of sales was mainly driven by the increase of delivery volume of the ES6 and ES8. Gross margin in the fourth quarter was negative 8.9% compared with negative 12.1% in the third quarter of 2019. The improvement in gross margin over last quarter was mainly driven by the improvement of vehicle margin. More specifically, vehicle margin in the fourth quarter was negative 6.0% compared with negative 6.8% in the third quarter of 2019. The improvement of vehicle margin…

Thank you. [Operator Instructions] First question comes from the line of Lei Wang of CICC. Please go ahead.

Good evening, William and Steven. This is Lei Wang speaking from CICC. Congratulations on the recent financing activities. I do believe that means a lot. So basically I got some questions. So in the business outlook, it guides a quarter delivery between 3,400 to 3,600 in the first quarter of 2020. So do you might provide some guidance on the sales target of this year? So would that be something close to like 30,000 units? That's the first question.

Thanks for your question. In our previous remarks that we have provided the guidance for Q1, that is 3,400 to 3,600. Just like we mentioned, this is mainly affected by the production capacity. Although our Hefei plant has resumed production on February 10, but the production capacity is still limited by those supply capacity, especially for those partners located in Hubei Province for the February and March delivery. Although at this moment, most all of the partners have resumed their production, but we do have some limitations and constraints regarding the parts supply. So for the partners in Hubei, they will still need some time to recover, the main challenge for the delivery in January is because of the production constraints, because after we produce our products, we will need to ship our products to the delivery centers and also make the appointment with our users to deliver the products to them. For the first quarter delivery, the main reason of the constraint is because of the production. But just like I mentioned, in the past 30 days, our orders have increased and right now the new orders have accumulated for over 2,100 or close to 2,200. It means that the daily new orders is around 70%. So for the level, it's actually quite similar or actually close to the 70% of the December level last year. At this moment we’re saying -- we're seeing the orders is ramping up. So we're quite confident about our annual sales target because our motto is make to order. So if we can resume the normal production, then it means that we can deliver our products to the users at much -- at a much faster rate. Every day we have accumulated some new orders from the users and at this moment we have around 5,000 order backlog. I cannot give you a specific number regarding our annual sales target, but according to all the data that we’ve shared, we're quite confident to achieve our internal annual sales target.

Your next question.

[Operator Instructions]

Operator, we think that Lei was dropped. So please continue with next analyst, please. Thank you.

All right. Sure. Thank you. Our next question is from the line of Dan Galves of Wolfe Research. Please go ahead.

Thank you very much for taking my questions. So volume was much higher in Q4 versus Q3, but the gross margin only improved a small amount. Can you talk about some of the things that maybe offset the impact of better scale?

Yes, definitely. As you mentioned, the volume increase in the fourth quarter as the gross margin slightly increased. The main reason is about the volume mix of the -- our products. We sold all ES6 base version in the fourth quarter. So the selling price is a little bit lower than the ES8. So the -- that's the main reason for the gross margin slight increases in the fourth quarter, yes. The -- yes -- okay.

Okay. That makes sense. And then as you’re looking ahead, I think that you said that you're expecting double-digit gross margin by the end of the year, but maybe you could clarify that comment. Can you give us a sense of what volume level that would require to get to that double-digit gross margin target? And if you can achieve that, would that support a cash outflow of neutral, or would do you think that there would still be a cash outflow once you get to double-digit margins on the vehicles? Thank you.

Okay. Yes, as William mentioned in his speech and the gross margin improvement in 2020 is mainly because the -- our supply chain optimization and continuous cost reduction of battery pack and also manufacturing cost savings brought forward by production scaling up and management optimization. And we have confidence that we can achieve this in 2020. Regarding the volume and also as we mentioned before, is we have clear time [ph], but it's difficult for us to measure this volume skill here for you. But we’re confident to get -- achieve of this target, yes.

I just want to add one point. In terms of the production capacity of the Hefei plant, we think the vast economy of scale should be around 4,000 per month. One shift production. So the one shift production should be around 4,000 per month. If we can get [indiscernible] and probably this can basically support our operation targets. We believe that for this year we should have some opportunity to achieve this.

And Dan perhaps some comments from Steven. If you look at our GP margin, it's related with several parameters. Of course, first, the volume and second, that our price. Third, our cost. Of course, we expect -- we don't change our sales target for 2020 and we’re very confident, we can achieve this sales targets, although the outbreak of novel coronavirus in January and February. And if we look at our sales price, we think and we're confident we're able to raise the ASP as more attractive options, such as NIO Pilot. And also, if you look at our cost side, of course, the battery cost were in a rate decline. Then, if we look on our other bond cost, the auto parts from other suppliers, we believe, a 10% decrease is reasonable. Third, and if you look at our previous accounting records, we actually compensate the NIO plant. And that means with the production volume to rise, our manufacturing expenses will gradually drop decline and we expect that to achieve 30% decline this year just from its manufacturing cost. Yes.

That's very helpful. Thanks a lot.

Okay.

Thank you. Our next question is from the line of Tim Hsiao of Morgan Stanley. Please go ahead.

Hi. Will and Steven and management team. Thanks for taking time to host the call. Just a few quick question. First of all, could I just have a quick follow-up question regarding the gross margin, because you just mentioned about a different product mix. So could we have a little bit more color about gross margin of EC6, the model launch in the upcoming Septembers? Would that be similar to ES6 or ES8, or could be slightly higher or similar or lower? And separately we noticed that the selling and marketing expenses rose a bit in fourth quarter of last year sequentially. So could we expect that to become the norm or further trend up considering that we target to open up to 200 stores, I mean, NIO Space by end of this year. And lastly, is our collaboration agreement binding on Hefei government before the deal is officially signed by end of April? Will the collaboration of potential investment took place at our China arm, or at listed company level? Thank you.

Thanks for your questions, because we haven't disclosed or announced the specific pricing of the EC6. And our EC6 is actually benchmarked model Y, we launched the EC6 at the end of last year. And we received very positive feedback from the public and our users. We will determine the specific pricing of the EC6 based on the market situation. We think probably we will announce the specific pricing around July. Gross margin is a very important objective for the company just like I mentioned to you, in my speech. EC6 shared many components together with ES6. At the same time, EC6's battery costs can be significantly reduced. In terms of the unit cost per watt hour in this Q4 will be reduced by 25% compared with the same period last year. So with all those factors in consideration, we are quite confident about achieving that gross margin target for the EC6 regardless of the pricing. Just like we have mentioned, NIO Space started from last -- actually last year, Q4. The main cooperation model for the NIO Space is to work together with our partner to set up and expand the NIO Spaces in the market. We work together with the partners based on the orders or the specific transactions that they can achieve in their store. So this transaction is based on the offline traffic and the orders as they can settle in their own NIO Spaces. As of speaking, the NIO Space model is quite efficient and its different from the NIO Houses. We're not going to increase the number of the NIO Houses this year. So we believe that NIO Space will not have a significant impact on our SG&A. And the efficiency of the NIO Space is actually quite high. Under the collaboration framework agreement with the Hefei municipal government, NIO China is a independent entity for the RMB financing activities. The Hefei municipal government will support the NIO China's long-term growth through the RMB financing project. It's not part of the new Inc [ph] equity financing projects. We haven't signed the definitive agreement yet with the municipal government. After we signed the final agreement, we will disclose the specific details.

Thank you.

Thank you.

Thank you.

Thank you. Our next question is from the line of Ryan Brinkman of J.P. Morgan. Please go ahead.

My question -- thanks for taking my question. I'm just curious how you are thinking about the likely sales or pricing outlook for battery electric vehicles, including for your vehicles relative to internal combustion engine vehicles, in light of the almost unprecedented recent decline in the price of oil and presumably soon, gasoline? Thank you.

Actually today the China government has adjusted the oil price and reduced the supply 15%. The government will adjust this oil price based on the international oil price, but it will not go any lower than US$40 because as the crude oil price is at -- is US$ 40. At this moment the crude oil price in the international market is around US$30. So it means that the Chinese government will not have any space to reduce the price further. Based on the current price, the cost of EV usage is still much better than that of the combustion car. So we think they will not have any significant changes regarding the cost of usage. I think it's the market consensus that in the long-term EV is going to replace combustion cars. The main reason for this trend is not because of the cost of usage, it's mainly because the EV is better fitted for the autonomous driving technologies and [indiscernible] in terms of the response time of the motor. At the same time, the Chinese government is quite determined in terms of the emission reduction. For example, the government has released many favorable policies for the EVs in terms of the license plate and the tax reductions. So those are the main impetus for the users to choose EV over combustion cars. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question is from the line of Bin Wang of Credit Suisse. Please go ahead.

Thank you. I actually want to clarify several numbers. Number one, is about the gross margin. You mentioned gross margin will be improving in 2020. So is the vehicle gross margin or is the overall gross margin including vehicle, that’s number one, I want to clarify. Second thing is about one-off expense. Can you quantify how big is the size of one-off expense and what's the detail about the expense? That's the second thing. And the third thing is actually you mentioned that in the first quarter, the costs will decline by 35% or another [indiscernible] is that the loss making in the number one quarter would decline by 35%. So what's the base for a decline for 35% in the first quarter this year? That’s the three things I want to clarify. And besides, actually, I’ve one question about the financing, because I think about the share price right now, the CB actually have the potential risk to demand [indiscernible] now converted to the share. So for upcoming, do you have any follow-up or anything up to the [indiscernible], any further financing plan? And actually, you can see in the media report, the automaker match that join your investments such as the GD, such as JC. So do you see any synergy, if you really got a shareholder from that traditional carmaker. For example, you can share their supply chain and there may be the component supply with much lower costs. Thank you.

Okay. So I want to start with the GP margin question. Yes, we think we will achieve positive GP margin for second quarter of 2020, and a double-digit GP margin in Q4 of 2020. Of course we -- first we refer it as our vehicle GP margin. And you can see our over -- because vehicle sales accounted for 94% of our total revenue. So our overall revenue -- our overall GP margin will be close to our vehicle GP margin, that’s first. Second, if you look at our other sales GP margin, it also improved in Q4 2019 and we are confident that with our efforts, our other sales GP margin will also improve in 2020. That's the first. And I think, Stanley will give you more explanation about the one-off, one-time cost.

Yes, the second question is about the one-off one-time expense. The majority were related to organizational restructuring across all functions, facility leasing contract termination compensation and also the strategy adjustments around the manufacturing and the supply chain. So that's the second question. Those are numbers. Total number is around RMB400 million, okay. That’s the second question. Third is about the our forward looking about the net loss of the first quarter of 2020. The comparison is with the first quarter of 2019. So compared with first quarter of 2019, we expect the first quarter of 2020 will decrease by 35%. Yes, it's quarter-on-quarter comparison.

So it's not the OpEx. It's the bottom line. So it's about RMB2.9 billion, decrease 35%. Is that true? So it's not OpEx. It's the bottom line, not net loss.

Yes, net loss. Yes.

Okay.

Yes, net loss. Confirmed net loss, yes. So the fourth question goes to William.

As we have been working together with other OEMs in various ways. For example, we have been working together with the JSC in terms of the manufacturing. And we also have a very good collaboration with GAC [ph] in terms of the GAC joint venture. Recently both parties have decided to increase investment in this joint venture and this joint venture is going to kick off the mass production of their vehicle models. We will continue this cooperation with those OEMs. Regarding other OEMs, we will continue to explore other possibilities to work with them in terms of the supply chain and R&D. But in terms of the equity or capital risk factor, we don’t have any specific information that we can disclose at this stage. If we have any information, then we would like it to disclose or we will share this information as soon as possible.

Thank you.

Thank you. Our next question is from the line of Lei Wang of CICC. Please go ahead.

Hi. [Indiscernible] disconnected and I wasn't able to finish the last question. So do we have some guidance on what the CapEx is going to be this year? It was reported that we are about to invest R&D center, a new R&D center and also the second manufacturing site?

In terms of the CapEx for 2020, the majority will be used for the new product and model lunch. For example, the tooling required for the product launch. It is a less than US$200 million. In terms of the cooperation with the Hefei municipal government, after we signed a definitive agreement with the government, we are not going to invest to build the R&D center or the manufacturing base in the Hefei municipal city. And this is not going to cause any pressure on our CapEx.

Okay. Thanks, William. Very clear.

Thank you. Our next question is from the line of Fei Fang of Goldman Sachs. Please go ahead. Hello. Fei Fang of Goldman Sachs. Your line is open. You can ask your question. Right. [Operator Instructions] Thank you. Our next question is from the line of Paul Gong of UBS. Please go ahead.

Hi, William. Hi, Steven. Thanks for taking my question. Two questions. The first one is, I remember in first quarter last year you have to pay -- you have to prepay the battery purchase to CATL for the full year. Is it still the case heading to 2020, heading through this year? This is my first question. And my second question is regarding your assumption on the battery price declined in -- throughout 2020. You mentioned that in Q4 of 2019 your battery cost is 20% cheaper than Q4 of 2018. But in Q4 of 2019 you’re still making negative gross margin despite of 8,000 delivery. So, when you mention by end of this year you are going to achieve double-digit gross profit margin. What's further battery cost decline or assumption [indiscernible]? I think, Steven mentioned 10% decrease on the other bond costs. But I just want to have your assumption on the battery cost assumption for this. Thank you.

Thanks for the questions. Last year due to the subsidy reduction, the passenger vehicle sales in China has slumped significantly, because our users are private users. And four other OEMs, normally they sell their cars for the operating usage. In this case our sales didn’t decline that significant compared with the sales of other OEMs. That is why right now we are one of the most important partner CATL. This year our cooperation with CATL is going to be even closer. This means we can get a much better deal together with the CATL compared with last year. For example, in terms of the payment terms. In terms of the price, starting from one year and half ago, we have been working together with CATL to reduce the price of the battery. This year we have witnessed significant cost reduction. Starting from the second quarter, we will have continue the cost reduction every quarter. In the fourth quarter of this year, we will launch the 100 kilowatt hour battery pack and the CTC battery pack. With those the new battery packs, we can further reduce the cost of without affecting the performance and the drive range of our vehicle models. The cost -- the unit cost of per watt hours is going to be reduced by 20% compared with last fourth quarter at the battery pack level. So we're confident that we can improve the gross margin. Just like we have mentioned, in terms of the gross margin improvement, the main drivers are the battery cost reduction, other bond cost reduction and the manufacturing cost saving. We're quite confident to see the positive result from those gross margin efforts.

Thank you very much.

Thank you.

That’s very helpful. Very glad to know that. Thank you.

Thank you.

Thank you. [Operator Instructions] And next question is from the line of Ming Li of Bank of America Merrill Lynch. Please go ahead.

Thank you. Thank you, William and the management team for your time. So I just have a few quick questions. So my first question is that right now -- because the overall EV consumption sentiment is still not very strong in China, so how do you think about any new strategy to help your volume sales? I know you talked about NIO products and also the NIO Space expansion, but do you -- will you have any new strategy to have on the volume sales? That’s my first question. Second question, some of the -- your competitors already think -- discuss to use LFP battery to lower the battery cost. But do you think it's a feasible choice for you? Since you have battery swap service and you have a lot of LCM battery for swap. So do you think it's a possible choice or you don't think it's a good choice for you to lower your [indiscernible] cost of battery? That’s my second question. And my third question is that, how [indiscernible] CapEx do you plan to spend on the battery swap and the battery charging station for this year? That’s my third question. Thank you.

Yes, it is a quite unique advantage for NIO in terms of the battery related innovations. This year we are going to launch a new concept called battery-as-a-service. This is going to leverage the power swap stations and the swapping technologies we have. It's quite important to improve the overall safety efficiency. In the world, only NIO can provide these kind of services to the users. Users can [indiscernible] the battery or swap the battery and operate the battery according to their specific needs. Right now we have already launched the 84 kilowatt hour battery pack to the users in our battery circulation system. So the users are free to -- are allowed to upgrade their battery pack with this 84 kilowatt hour battery. In terms of the battery-as-a-service, this is going to be a very important strategy for us to boost our self. Besides other strategies we have mentioned, we are now having very close discussions with government authorities regarding the specific policies for the battery-as-a-service. The current progress is quite positive. If there's any kind of important information that we will share with everyone right away. Because we have the swapping technology in place, so we are quite willing to explore different technologies and materials for the battery packs. But when we make these decisions, we will consider the performance experience and the cost. For example, we have the same battery pack size with different kind of energy density, like 100 kilowatt hour battery pack and 84 kilowatt hour battery pack. This year with the P2P [ph] technologies, so we will be able to launch this 100 kilowatt hour battery pack. This is our unique advantage. This means that we should also be free to explore the possibilities in terms of the RFP material. In terms of the swap station and CapEx investment related with the battery, we will increase the investment a little bit this year because our user base is increasing. But overall speaking for this year, it's going to be around RMB100 million. Thank you.

Thank you, William.

[Operator Instructions] Our next question is from the line of Fei Fang of Goldman Sachs. Please go ahead.

Hey, great. Let me try my luck this time. Thanks, William, Steven and Jade. Just two quick questions. Apologies if this had been covered before. So for the first quarter volume guidance, is it possible to break it out by ES8 and ES6? And then the second question is that we noticed in that cash in the fourth quarter didn't really changed much from the third quarter, despite we still have a RMB2.8 billion loss. So can you maybe walk us through some of the major items in the cash flow statement. What has been sort of driving the better than sort of earnings, free cash flow in the fourth quarter? Thank you.

In terms of the sales for the first quarter, the majority of the sales are contributed by the ES6, because we are about to deliver the all-new ES8 in April. This means the orders for the current ES8 is going to decrease because people would like to replace orders for the all-new ES8. Our motto is make to orders, so this is quite unique for us because at the end of last year we have a launch with the all-new ES8 and started to accept the orders from the public.

Okay. Regarding the second question about the cash flow of fourth quarter of 2019, I think first it's about we closely monitored our cash position in the fourth quarter. So the operating cash flow, I think decreased compared to the last quarter. Secondly, as we mentioned in our Q3, 2019 earnings release, [indiscernible] CB was closed in the first quarter. So there is still some cash injection in this quarter. So combined with those effect, I think the total net cash outflow is a little bit lower than the total loss. So I think that's the reason. Thank you.

And sorry, just want to confirm, [indiscernible] CB was US$100 million, not the inflow -- financing inflow in the fourth quarter?

Yes.

Okay, great.

[Indiscernible] totally US$100 million and the majority came in the fourth quarter.

That's great. Very helpful. Thank you.

Thank you. As there are no further questions, I'd like to turn the call back over to the company for closing remarks.

Thank you again for joining us today. If you have any questions, feel free to contact NIO's Investor Relations team through the contact information provided on our website. So this concludes the conference call. You may now disconnect your line. Thank you.

Thank you. Thank you everyone. Bye.

Thank you. Ladies and gentlemen, that concludes your conference for today. And thank you for participating. You may all disconnect.