Hello, ladies and gentlemen, and thank you for standing by for the NIO Incorporated [First] (ph) Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Eve Tang from Capital Markets. Please go ahead.

Good morning and good evening, everyone. Welcome to NIO's second quarter 2023 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 Mr. William Li, Founder, Chairman of the Board and Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, Senior VP of Finance; and Ms. Jade Wei, VP of Capital Markets. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements that 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 Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. 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 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, please go ahead.

[Foreign Language] [Interpreted] Hello, everyone. Thank you for joining NIO's 2023 Q2 earnings call. In the second quarter of 2023, NIO delivered a total of 23,520 smart electric vehicles. In July 2023, as we started mass production and ramp up of more new models, NIO's monthly delivery volume grew rapidly to 20,462 units, representing a year-over-year growth of 104% and a new monthly high. According to the retail statistics of [Cartrack] (ph), in July, NIO was the best-selling brand in the premium electric vehicle segment with the transaction price of over RMB300,000, claiming a 59% market share. As NIO completes its product lineup, further expands the sales and service network and the power network, enhances its all-around sales capability and the [role of] (ph) sales and marketing plans, the competitiveness of the NT2 products has been further unleashed. The delivery volume in the third quarter of 2023 is expected to be between 50,000 -- 55,000 and 57,000 units. And now I would like to share with you the recent highlights of our products, R&D and operations. Following the delivery of the flagship coupe SUV EC7, the flagship sedan 2023 new EC7, and the all-round SUV all-new ES6 earlier this year, we started to deliver the smart electric tour ET5 Touring or ET5T for short, and the flagship SUV all-new ES8 in June. In the second quarter, NIO achieved high-quality delivery of five new models, with user satisfaction exceeding our expectations. This also proves NIO's capabilities of conducting fast product iteration and the managing product complexity. In September, we plan to launch and deliver the new mid-sized coupe SUV EC6, which marks the completion of our product transition to the NT2 platform. With that, NIO's entire NT2 product lineup, featuring eight different models, will have entered the premium BEV market to…

Thank you, William. I will now go over our key financial results for the second quarter of 2023. And to be mindful of the length of this call, I will reference to RMB only in my discussion today. I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the second quarter were RMB8.8 billion, representing a decrease of 14.8% year-over-year and a decrease of 17.8% quarter-over-quarter. Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sales in the second quarter were RMB7.2 billion, represent a decrease of 24.9% year-over-year and 22.1% quarter-over-quarter. The decrease in vehicle sales year-over-year was mainly due to the lower average selling price as a result of higher proportion of ET5 and 75-kilowatt hour standard-range battery pack deliveries and decrease in delivery volume. The decrease in vehicle sales quarter-over-quarter was mainly due to a decrease in delivery volume. Other sales in the second quarter were RMB1.6 billion, representing an increase of 119.9% year-over-year and 9.3% quarter-over-quarter. The increase in other sales year-over-year was mainly due to the increase in sales of used cars, accessories and provision of power solutions, as a result of continued growth of our users. The increase in other sales quarter-over-quarter was mainly due to the increase in sales of used cars and provision of power solutions, as a result of continued growth of our users, partially offset by decrease in revenue from provision of auto financing services. Gross margin in second quarter of 2023 was 1.0% compared with 13.0% in the second quarter of 2022 and 1.5% in the first quarter of 2023. Vehicle margins in the second quarter was 6.2% compared with 16.7% in the second quarter of 2022 and 1.1% in the first quarter…

Thank you. [Operator Instructions] And the first question will come from Bin Wang of Credit Suisse. Please go ahead.

Thank you. My question is about your sales network structure. Recently, I heard you hired a few of the salesperson from other luxury brands such as BMW, Mercedes and Audi. So, what's the reason you hired non-NIO salesperson recently? And how is the impact so far for your sales volume increase? We also found that in your third quarter guidance, you actually implied in August and September, September will be lower compared to July. So, kind of what's the reason behind it? It's because supply chain issue? Thank you so much.

[Foreign Language] [Interpreted] Well, thank you, Bin Wang. For your first question, actually, around June, we have realized that inside of the company in terms of the number of our salespersons as well as the capabilities of selling products, we are lagged behind by the competitors in the market. For example, for those luxury brands like BMW and Mercedes, the size of their sales team is six to seven times of ours. Without sufficient personnel or touchpoint, we cannot realize a very good user satisfaction, realize very good test drives or high conversion rate from these two orders. So starting from June and -- July and August, we have taken a more active manner in improving our sales capabilities. And with that, we hope that the company will be able to support the new orders of 30,000 units per month that will be contributed by our sales network as well as the personnel increase. So that by the end of September, we will be able to realize that target. Of course, it takes time for us to really train the personnel and also to find the locations. So, we will have that initial capability ready by the end of September, and then the real effect will kick in from October. That is our existing plan for the improvement. This is also why starting July and August, we've been taking some active measures and actions in expanding our sales network and touchpoints, especially in lower-tier cities where we don't have a full-fledged facilities or stores, we hope to really secure and hire experience and seasoned salespersons who have their networks and user bases already to help us with the sales test. And regarding your second question, in July, we have delivered more than 20,000 vehicles. And as shown by our guidance,…

Thank you.

The next question comes from Tim Hsiao of Morgan Stanley. Please go ahead.

Hi. Thanks for taking my question. So, my first question, basically, I just want to follow up regarding the sales volumes into second half. Because as William just mentioned, we successfully upgraded our sales team and sales network. So, looking into fourth quarter, I recall that we expect our monthly sales can stay above 20,000. So, if that's the case, look into fourth quarter, should we expect NIO to grow the sales further to above 20,000 or even like 25,000? And what could the contribution from the four volume driving models covering like ET5, ES6? So, could you just provide some update regarding volume? And my second question is about the gross profit margin. Because according to the management's previous guidance, I think the vehicle gross profit margin could get back to double digit in the second half. So, after the RMB30,000 cost in late June, do you still stick to your previous view on sequential margin expansion into second half? What would be the pace in the quarter and fourth quarter, respectively? That's my second question. Thank you.

[Foreign Language] [Interpreted] Thank you, Tim, for your question. Regarding your first question, of course, we target to realize and stabilize our monthly delivery to be above 20,000 units starting Q4 this year. But in the meantime, we are also preparing our sales capability, so that we can support the new orders of 30,000 units per month. In this case, we are expanding our channels and also personnels. As mentioned, we will be occurring these initial capabilities by the end of September, and we will take some time for the preparation and ramp-up. We believe that the effect of our sales capability improvement will be kicking in from October and November with positive progress from that time point. In terms of the reference to the NT1 product we've experienced, normally, we realize that it will take around one to two years for the new product to reach a sound and stable volume on a monthly basis. For example, for our first generation ES6, it was launched in 2019, and it was not until 2021 that it has a rather stable and sound monthly delivery. So, we are very confident with our new products. In terms of the volume products, including ET5, ET5T, ES6 and EC6, these are 4 volume products. For the EC6, it will be delivered starting September and it will take some time for the production and the delivery ramp up. But within its own segment, it will be dominating the major market share. So, with these four models combined, we believe that its monthly volume will be stabilized at around 15,000 to 20,000 units. In terms of higher volume -- higher service products like EC7, ET7 and ES7 as well as ES8, we are expecting also increments on their sales volume. Yes, Stanley will answer the second question.

Yeah. Hi, Tim. Regarding the gross profit margin, as shown in our Q2 financials, the vehicle margin is 6.2%, similar with Q1. The key reasons are sales and production volume at a lower level, driving higher manufacturing costs and other cost allocation and also more promotions to the users and also marketing efforts during the product transition period. But along with our sales and volume ramp-up of our -- all our NT2 product, our target to achieve double-digit gross profit margin in Q3 and 15% in Q4, if we can control the battery cost and other costs well.

[Foreign Language] [Interpreted] So, we have already digested the impact of the price reduction.

Got it. Thank very much, William and Stanley. Thank you.

Thank you, Tim.

Thank you, Tim.

The next question comes from Yuqian Ding of HSBC. Please go ahead.

Thanks, team. Yuqian here. I got two. First question is, we practically have all the models are now refreshed and then newly launched based on 2.0 platform model is a pretty comprehensive coverage. We will be expecting strong ramp-up in the coming six months in a visible way. But how do we expect the key growth drivers, if we're looking at 12 to 18 months, especially in terms of new product? How do we fill in the already comprehensive product portfolio or the software is going to be the next leg of growth? The second question is on the OpEx side. So, this year, we have new model launches and we have the sales channel upgrade. But next year, when we're rolling into next year, could we see the absolute OpEx value dialed down a little bit? Thank you.

[Foreign Language] [Interpreted] Thank you for your question. Regarding your first question, as you may know that starting from September, we will launch our EC6 into the market. And with that all its models on the NT2 platforms will be launched to the market. And over the past several months, we have launched five brand new models plus a facelift. In such a short timeframe, we are able to realize the high-quality deliveries of this model. This has also demonstrated our R&D efficiency as well as the strong execution. But in the meantime, we also need to realize that it's a challenge brought by the smart electric vehicles to the entire industry as in a very short timeframe, we needed to catch up to the changes of all the smart technologies. But in the meantime, for all the NT2 products, we are looking at more software features to be updated and released. For example, our new assisted and intelligent driving. For the coming months, we will be rolling out some new features and also services. This will help us to improve the competitiveness of the product. And also, as we've mentioned, we are developing the sales capabilities inside of the company so that we can reach out to broader channels with more salespersons and support the new orders of 30,000 units per month. This will also be a very concrete foundation for the continuous growth of the sales and deliveries in the coming months. If you look at our eight models on the NT2 platform, they are already covering 80% of the needs in the premium market. And also, we have also adjusted our organizational structure starting from the third quarter. So that from the headquarters to the regional companies, we will be having dedicated teams managing and responsible for each of the model across the life cycle. This is also the efforts we've made from the sales and marketing perspective.

Hi, Yuqian. Regarding the OpEx of next year, the next year budget for us has not been ready. So at this moment, I may not be able to give you the precise number, but I can give you some feeling. Regarding the R&D expense, as introduced in last quarters, on average, each quarter this year, the non-GAAP R&D investments will be RMB3 billion to RMB3.5 billion for this year. I think for next year, the -- we will keep similar like investment R&D activities. And regarding the SG&A expense, as explained by William, we have a relatively more aggressive sales targets for the second half of this year, I think, should be for next year. So the absolute value for SG&A will grow accordingly since we need more market activities and events. But the percentage of total sales revenue, I think, will decline compared with the first half of this year and also the whole -- I think the whole year of 2023, because of the improvements in both, I think, delivery volume and also operating efficiency. Thank you, Yuqian.

The next question comes from Jeff Chung of Citi. Please go ahead.

[indiscernible] Hello. I have two questions. First question is our refinancing plan going forward. And the second question is our cash flow projection into the third quarter and fourth quarter. So, why I am asking this is because we saw the first quarter, the net cash outflow was RMB10.6 billion, but improved to a cash outflow of RMB5.9 billion in the second quarter. And within the second quarter, we also saw the inventory Q-on-Q delta of around RMB5 billion, while the account payable -- account receivable remained stable. So that said, if the third quarter inventory came down plus the operating leverage with a volume hike, whether we should see the cash outflow should be significantly narrowing further? This is my first question. And my second question is about the third quarter and fourth quarter GP margin guidance. When can we return to a 10% or double-digit level as well as the third quarter, fourth quarter SG&A as a percentage of the revenue guidance? That's all from me. Thank you.

Okay. Thank you, Jeff. Stanley, please answer the first question.

Yes, regarding the cash flow, I think -- sorry. Yes, regarding the cash flow and also the refinancing plans, I think several points about this. One is regarding operating cash flow, I think as the delivery volume ramp-up from Q3 this year, our operating cash flow will be significantly improved compared with Q1 and Q2 of this year. And we also carried out a series of measures to control the CapEx investment and also manage our investment cadence prudently like delay or cancel of certain CapEx investments. This will also help us to manage the healthy cash flow. And additionally, as explained in William's comments, we received US$740 million strategic investment from CYVN. And we also completed the offering of our first off-balance sheet ABS in Q3. I think both our U.S. dollar and also RMB financing channels remain [undrafted] (ph). And all those will enable us to keep a healthy cash position and support the ongoing business development of the company. And regarding the financing -- refinancing plan, we will disclose our plan accordingly if there is any capital market-related updates. But at this moment, I think we don't have the precise information to comment with you. Yes, that's the first question regarding the cash flow and also refinancing plan. The second is for this year's margin?

Yes.

For this year's margin, I think we have explained in the previous questions. And for Q3, our target is to achieve the double-digit gross profit margin and Q4 is 15%. And for SG&A guidance, I think the absolute value will grow along with our delivery volume and sales growth, but the percentage of total revenue will decrease. But according to the market situation, the adjustment and the change of our marketing strategy will be quite dynamic. So at this moment, I cannot give you the precise guidance about the percentage of SG&A over sales revenue. Thank you, Jeff.

Thank you. Just a correction here. I mentioned the inventory Q-on-Q delta was RMB5 billion, which was wrong. I just checked that the Q-on-Q data was only RMB2 billion. That's it from my side. Thank you. Thank you very much.

Yes, welcome. Thank you.

The next question comes from Ming-Hsun Lee of Bank of America. Please go ahead.

[Foreign Language] So I have two questions. The first question is, currently, you have eight products to cover the majority of the luxury car segment. So, could you give more guidance on any of the new product plan next year under the NIO brand as well as the ALPS brand? And the second question is, what is your latest business progress for the mobile business? Thank you.

[Foreign Language] [Interpreted] Thank you for your question. For NIO brand, actually, we don't plan to launch any new products in the year of 2024. Of course, we will still roll out some routine facelifts or product upgrades, but we haven't planned any new products for next year, because we think that it's more important for us to stay focused on our existing eight products on the NT2 platform to continuously improve its qualities and also market performance. Just like in 2021, we didn't launch any new models, but still we have realized a very good gross margin, sales volume as well as quality performance. So that's the plan for the brand of NIO. In terms of our mass market brand, ALPS, we plan to launch the very first model from ALPS in the second half of next year. Right now, the R&D activities are proceeding according to the plan. Actually, we have just rolled out the verification build of the first model from ALPS and this model will be highly competitive in its product segment. And also for the brands of ALPS, its R&D philosophy is different from that of NIO. ALPS is targeting at the mass market, and we will not have many products in the lineup for ALPS. But for NIO, it's different. It is targeting at the premium segment where we care more about the personalization and also the differentiation of the products. Just like Mercedes and BMW in China, they are selling 40, 50 models. That is a unique character of the premium segment. But for ALPS, for the mass market, it will be more family oriented and we will also care more on the sales volume of each model launched by ALPS. In terms of our phone business, our mobile phone will be developed mainly for our new users, especially the users of our NT2 products. And the phone itself is developed centering on the vehicles, but with better mobility and connectivity experience. We are actually believing that with the phone business, it can help us to improve the competitiveness of our vehicle products, because our phone business is not to compete with those phone makers. Instead, we would like to use the phone as a carrier to provide the best experience for our vehicle users. Moreover, the underlying software and the underlying logic between the phone and the cars shares quite a lot of similarities. In terms of the launch plan for the phone, we plan to introduce our first phone product in the second half or in late September.

The next question comes from Paul Gong of UBS. Please go ahead.

Thanks for taking my questions. So two questions here. The first question is regarding the sales channel. You mentioned that you are going to expand it. You feel it's behind of the BMW and Mercedes Benz in terms of the channel as well as a sales person. But how does it compare to other EV start-ups? Are we ahead or are we behind? And how much do you think about the expansion of the store network and the sales personnel versus the sales efficiency improvement? And you also mentioned you are going to reach 30,000 monthly sales capability. How does that compare to today? Is that fair to assume? Currently, we have the capability to sell 20,000 monthly sales, given we already achieved that in July and expanding would be about 50% compared to today to 30,000. How does this mathematics work? This is my first question. The second question is regarding the battery swap versus fast charging given the batteries, the semiconductors as well as even the charging piles, DC charging stations, all these seems to be rolling out with the industrial efforts. How -- I understand it's good to have both the battery swap as well as the fast charging, but would you consider the rolling out of fast charging kind of weak and the battery swap convenience and the competitive edge of NIO's cars? Thank you.

[Foreign Language] [Interpreted] Thank you for your questions. If you look at the size of the sales teams in comparison to other EV start-ups in China, actually, by the end of June, the size of our sales team is only half of those of other companies. Of course, in terms of the service network, we have specialties and the teams working for the power swap stations, roadside services as well as at the new houses. So for the service and community part, we have a bigger team than other EV start-ups. But when it comes to the actual sales person, in our company, we call them fellows. In terms of the number of fellows, we are -- actually have a much smaller team than all the other companies in the industry. In April and May this year, our delivery volume was not very high. By then, we didn't really realize the importance of the sales capabilities. We're taking any actions. But starting from June, as we ramp up our delivery volumes, we gradually realize that the insufficient sales teams has affected the satisfaction and also the execution of many things, including test drive and also order conversions. That's why starting from July, we have started to develop our sales channels as well as the sales team. For comparison, to ramp up to the comparable side, we believe that we need around 5,000 people working on the sales team. But of course, it takes time for us to have that many people on the team and also to train them with the corresponding capabilities. In terms of the delivery volume, in July, we have delivered more than 20,000 cars, but that demonstrated our capability in terms of the deliveries, which is relatively easier than realizing sales capabilities. And another thing is…

Thank you very much. That's very helpful. Thank you, William.

Thank you, Paul.

The next question comes from Jing Chang of CICC. Please go ahead.

Okay, thank you for your sharing. I have two following-up questions. The first is about our other sales revenue and profit margin. As we can see that after our policy adjustment, what is our expectation for the future revenue and also profit margin for other sales after our battery swap started to gain profit? And in particular, do we have any internal calculation of the profitability of the battery swapping business? So, what is the upward trend of our gross profit margin for other sales in the following few quarters? And when will it turn positive? This is my first question. And my second is about the technology improvement. We have always been focused more on R&D investment and also technology accumulation. So, looking forward regarding to our next generation platform, NT3, so what improvement can we expect? What are the major areas of our effort to [proceed] (ph)? So, can you just share a few insights of information about that? This is my two questions. Thank you.

Hi, Jing. This is Stanley. Regarding your first question about the other sales, revenue and margin, as we mentioned, we canceled the free battery swap policies in Q3. So therefore, there will be more users to pay for battery swap services. And as the sales keep growing, we think more battery swap service revenue can be realized. But since it's only one month from the policy adjustment, so we still need some time to observe and assess the impact of this policy change. Second is with the power swap station, the third generation put into operation starting from this April, we will accelerate the deployment of the power swap stations in the following quarters. And for this year, our plan is to build 1,000 stations. But at current stage, the capacity won't be fully utilized. So, the losses from the accelerated construction of power swap station will increase. So, I think that's basically the guidance for the other sales revenue.

[Foreign Language] [Interpreted] Actually, the inherent efficiency of the power swap business is pretty high. Before we have negative margin on this part, it's mainly because when we were offering free power swaps, the electricity costs were also included in that offering. But now we are charging that separately. In addition, we are also charging our users RMB30 per swap as a service fee. Actually, we are seeing growing demand for such charged power swap services. Especially many used car users, they are actually using the service. So, the percentage for the users to use the paid swap service is also growing. It's mainly a business for the existing users and existing population. For the third-generation power swap stations, we've also done a rough calculation. When it completes 60 swaps per day, it basically can be breaking even, and its service revenues will be covering its operating costs. Right now, around 20% of our third-generation stations are able to realize such performance and capability. So, for the long run, we believe that power swap is also a sustainable business. As in addition to offering power swap services, we also have other diversified business models like we can leverage the energy storage. Regarding your second question about our next-generation technology, of course, we will be leveraging our full stack capabilities developed in-house. With that, we will continue to improve the experience and also the performance of our products. And we believe that this will give us a strong product competitiveness worldwide. And also the continuous investment into the research and the development of the core technologies will also help us to optimize and improve the vehicle margin as well as improving the efficiencies of our operations and R&D. Thank you, Jing.

Okay, thank you. That's all my question. Thank you.

The next question comes from Edison Yu of Deutsche Bank. Please go ahead.

Hey, thank you. I have one question. I'm wondering what is the management team's openness to embarking on some more strategic action? We've obviously seen a lot of activity from the European OEMs in China trying to revive or restructure their efforts. And I also think in the context of -- I think NIO has made some mistakes. We talked a lot about sales, the sales force today, we had a lot of supply issues last year, many of which are related actually to more traditional auto side. Can we perhaps benefit actually from having some more closer strategic relationships with some of the OEMs out there? Thank you.

[Foreign Language] [Interpreted] Thank you, Edison, for your question. Overall speaking, we are very open to all kinds of cooperations with peers in the industry. But so far, we don't have much information to update or share with you. But if you look at our smart technologies as well as our charging and swapping networks, actually, we aim to use these technologies to catalyze the transformation of the entire industry. As we've also announced at the Power Day 2023, we are willing to open up our next-generation battery technologies as well as our charging and swapping networks to the entire industry. Right now, we are in some initial communications with certain OEMs. They are also thinking about using our battery technologies for swapping networks. But to use that technologies, they need to adapt their products to our standards, which can take some time for them to make the final decisions. But overall speaking, we are very open to all kinds of cooperation. And in terms of our existing charging network, so far, 80% of our electricity are actually charged for the non-NIO users. Maybe you've also read this news recently in Xinjiang, Sayram Lake because it's such a popular tourist spot, we have to limit access to our public chargers for the non-NIO users at certain timeframes, and that caused some complaints by the non-NIO users. But overall speaking, it's also a very good example of showing our existing charging and swapping facilities are helping many EV users, not just the user from NIO.

Great. Thank you.

Thank you, Edison.

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

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