Earnings Call Transcript - LI Q1 2024

Operator, Operator

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

Janet Chang, Investor Relations Director

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

Xiang Li, CEO

Now translating for Mr. Li. First, I'll begin with a review of Li Auto's first quarter performance. In the first quarter, we delivered over 80,400 vehicles, which is an increase of 52.9% year-over-year. According to the China Automotive Technology and Research Center, the NEV market priced over RMB 200,000 grew by 24.8% year-over-year during this period. Our growth rate significantly surpasses that of the market, positioning us as the leader among all premium NEV brands. Driven by the increase in vehicle deliveries, our total revenue for the first quarter reached RMB 25.6 billion, marking a year-on-year increase of 36.4%. Despite the launch of Li MEGA, the transition of the L Series, and subsequent price adjustments, our gross margin for the first quarter remained healthy at 20.6%. In the long run, our strong balance sheet, with cash reserves approaching RMB 100 billion, will continue to empower us to prioritize user value creation and invest firmly in R&D while we deliver products and services that exceed family expectations. However, we have faced several challenges since the beginning of the year related to our internal operations and changes in the external landscape. Our performance this quarter did not meet our expectations set earlier this year. In response, we promptly took action and implemented adjustments throughout our business, including organizational restructuring and workflow optimization. We are confident that these initiatives will improve our internal operational efficiency and enhance our decision-making quality moving forward, allowing us to focus more on delivering user value. Regarding our products, we introduced Li MEGA on March 1, our first HPC BEV model and a high-tech flagship MPV for large families, built on our latest 800-volt battery electric platform and equipped with the Qilin 5C battery. Li MEGA ranks among the fastest charging mass-produced passenger vehicles currently available. During China's Labor Day holiday, Li MEGA users saw an average charging time of only 12.8 minutes at our supercharging stations, which greatly reduced energy anxiety. On April 18, we launched Li L6, a five-seat premium family SUV aimed at young families looking for vehicles priced below RMB 300,000. Li L6 boasts a spacious interior and superior features, offering a CLPC range of 1,390 kilometers. In terms of safety, the vehicle is designed to meet the industry's most stringent testing standards. Coupled with our continually enhancing full scenario AEB system included as standard on the vehicle, Li L6 provides strong safety for families on the road. With the official launches of Li MEGA and Li L6, alongside the 2024 model year offerings of Li L7, L8, and L9, our product portfolio caters to a diverse range of family users at price points between RMB 200,000 and RMB 600,000. In response to competitive market challenges in late April, we acted swiftly by introducing a new pricing scheme that was well received, leading to a significant uptick in store visits. During the holiday, weekly order growth reached an unprecedented high. Particularly, Li L6 received over 41,000 orders during its initial sales period from April 18 to May 5. We are fully committed to ensuring a strong supply and ramp-up in production for Li L6 to facilitate a rapid increase in deliveries. Alongside the launch of our new models, we are also enhancing our economic driving platform. In mid-May, we began rolling out Li AD Pro 3.0 to all our users, which features an upgraded model-based BEV architecture with enhanced functionalities, including highway NOA capable of over 1,000 kilometers of driver takeover mileage. City LCC can identify traffic signs and autonomously stop and start at intersections in real time, as well as handle complex parking scenarios. In May, we initiated public beta testing for Li AD Max 3.0, where about 1,000 users tried our latest city NOA feature, which operates without the need for high-definition maps and covers all roads nationwide. We intend to implement the city NOA in all AD Max vehicles by the third quarter of this year after completing initial nationwide testing. Concerning our charging network, we currently operate 404 supercharging stations with 1,770 charging stalls. During the May Day holiday, we provided over 54,000 complimentary charging sessions and waived fees for users across our models. Additionally, we facilitated over 96,000 charging sessions for NAV users nationwide and across various brands. We plan to continue expanding and accelerating investments in our supercharging network with the goal of having over 10,000 charging stalls available in highways and cities across China by year-end, further enhancing the ultrafast charging experience for all our battery users. Regarding our sales network, we have established a presence in all first-tier, new first-tier, and second-tier cities, as well as 89% of third-tier cities nationwide. This year, we will steadily expand our footprint in more cities to increase product penetration in China. Our service network is also rapidly growing, ensuring that we provide high-quality services to our users. As of April 30, 2024, we have 481 retail stores in 144 cities, along with 361 service centers and Li Auto authorized body shops operational in 210 cities nationwide. Looking ahead to the second quarter, we anticipate vehicle deliveries to be between 105,000 and 110,000, driven by strong market demand and our new products along with recovery in orders. By fine-tuning our operations and upgrading our organizational structure, we are confident in further enhancing operating efficiency, increasing user value, and pursuing healthy growth.

Tie Li, CFO

Hello, everyone. I will now walk you through some of our 2024 first quarter financials. Due to time constraints, I will now address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the first quarter were RMB 25.6 billion or USD 3.6 billion, up 36.4% year-over-year and down 38.6% quarter-over-quarter. This includes RMB 24.3 billion or USD 3.4 billion from vehicle sales, up 32.3% year-over-year and down 39.9% quarter-over-quarter. The year-over-year increase was mainly attributable to higher vehicle deliveries, partially offset by the lower average selling price due to the different product mix and pricing strategy change between the two quarters. The sequential decrease was mainly due to decreased vehicle deliveries, which were affected by seasonal factors related to the Chinese New Year holiday and lower expected order intake in March. Cost of sales in the first quarter was RMB 20.3 billion or USD 2.8 billion, up 36.1% year-over-year and down 36.3% quarter-over-quarter. Gross profit in the first quarter was RMB 5.3 billion or USD 731.9 million, up 38% year-over-year and down 46% quarter-over-quarter. Vehicle margin in the first quarter was 19.3% versus 19.8% in the same period last year and 22.7% in the prior quarter. The vehicle margin remained relatively stable year-over-year. The sequential decrease was mainly due to lower average selling price as a result of pricing strategy changes in the first quarter and true-up adjustments of the warranty reserve in the prior quarter based on updated estimates of cost of future claims. Gross margin in the first quarter was 20.6% versus 20.4% in the same period last year and 23.5% in the prior quarter. Operating expenses in the first quarter were RMB 5.9 billion or USD 812.9 million, up 71.4% year-over-year and down 13.1% quarter-over-quarter. R&D expenses in the first quarter were RMB 3 billion or USD 422.3 million, up 64.6% year-over-year and down 12.7% quarter-over-quarter. The year-over-year increase was primarily due to increased employee compensation as a result of growth in the number of staff as well as increased expense to support the expanding product portfolio and technology. The sequential decrease was mainly in line with timing and progress of new vehicle programs. SG&A expenses in the first quarter were RMB 3 billion or USD 412.4 million, up 81% year-over-year and down 8.9% quarter-over-quarter. The year-over-year increase was primarily due to increased employee compensation as a result of the growth in the number of staff, as well as increased rental and other expenses associated with the expansion of our sales and servicing network. The sequential decrease was mainly due to lower vehicle deliveries. Loss from operations in the first quarter was RMB 584.9 million or USD 81 million versus income from operations of RMB 405.2 million in the same period last year and RMB 3 billion in the prior quarter. Operating margin in the first quarter was negative 2.3% versus positive 2.2% in the same period last year and positive 7.3% in the prior quarter. Net income in the first quarter was RMB 591.1 million or USD 81.9 million, down 36.7% year-over-year and 89.7% quarter-over-quarter. Diluted net earnings per ADS attributable to ordinary shares was RMB 0.56 or $0.08 in the first quarter versus RMB 0.89 in the same period last year and RMB 5.32 in the prior quarter. Turning to our balance sheet and cash flow. Our cash position remained strong and stood at RMB 98.9 billion or USD 13.7 billion as of March 31, 2024. Net cash used in operating activities in the first quarter was RMB 3.3 billion or USD 462.9 million, versus net cash provided by operating activities of RMB 7.8 billion in the same period last year and RMB 17.3 billion in the prior quarter. Free cash flow was negative RMB 5.1 billion or negative USD 700.1 million in the first quarter, versus positive RMB 6.7 billion in the same period last year and a positive RMB 14.6 billion in the prior quarter. And now for our business outlook. For the second quarter of 2024, the company expects deliveries to be between 105,000 and 110,000 vehicles, representing a year-over-year increase of 21.3% to 27.1%. The company also expects second quarter total revenue to be between RMB 29.9 billion and RMB 31.4 billion, or USD 4.1 billion and USD 4.3 billion, representing a year-over-year increase of 4.2% to 9.4%. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session.

Operator, Operator

Your first question comes from De'an Wang with Deutsche Bank.

De'an Wang, Analyst

The first question is about volume. Your guidance for the second quarter is 105,000 to 110,000 units, which means you need to sell 360,000 units in the second half, resulting in a monthly volume close to 60,000 units. The MEGA volume was quite small, and further delays are expected, so achieving a monthly volume of 60,000 units may pose a challenge. If there is pressure to meet this target, would you consider revising the volume target? My second question is about gross margin. You previously guided for a full year gross margin of 20%. If you aim to maintain this after the pricing cut, what will drive the margin? Is it the increase in volume once you hit 60,000 units monthly, or is there another factor that will help maintain the 20% gross margin?

Liangjun Zou, Senior Vice President

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

Tie Li, CFO

Our follow-up highlights that the most crucial aspect following the challenges in Q1, particularly after March 1st, is the recovery of sales. This remains a top concern for everyone in the company. As we know, the auto industry experiences significant economic fluctuations. Therefore, as our sales recover, I believe the pressure on gross margins will ease somewhat. Furthermore, with the L6 contributing positively to sales growth, optimizing our product mix will be key in affecting our gross margins. We have also taken various steps to manage organizational dynamics, which will help alleviate market pressures. However, it's important to note that we have been facing these challenges since March, so I believe the second quarter will be the toughest for the company this year.

Operator, Operator

Your next question comes from Tim Hsiao with Morgan Stanley.

Tim Hsiao, Analyst

I would like to ask about the sales volume, given that management noted the increasing competition in China this year. Even though Li Auto has recently launched its 2024 models, including the L6, and made some reasonable price adjustments, what strategy does the company have to increase sales volume? You mentioned that sales have been suppressed. Would the company consider upgrading specifications or implementing additional price cuts to significantly impact sales volumes in the second half, not just for the L6, but also for the L7, L8, L9, and the pure EV models? That's my first question.

Unknown Executive, Unknown

First, regarding our pricing strategy, after the price adjustment in April, we received consistent feedback demonstrating that the current pricing is very competitive in the market and has been well received by our customers, as reflected in the continued growth of order intake since April. Therefore, we do not have any plans for additional price cuts. Concerning gross margin, we believe that for a healthy company, sales and gross margin are the two most critical operating metrics. As a nine-year-old car company, Li Auto has consistently evaluated itself against these two essential metrics.

Tim Hsiao, Analyst

My second question is about expenses. With Li Auto's updated sales targets for 2024 and 2025, what do you consider to be reasonable figures for employee numbers, sales networks, marketing expenses, and R&D spending? When will cost-saving benefits show up in Li Auto's financials? That's my second question.

Tie Li, CFO

This is Johnny. Given our new sales growth targets, the company has quickly adjusted resource allocation across various aspects in the last less than two months to better align with this year's operating objectives, as we have just mentioned. We expect this adjustment will have some initial impact on results starting from Q2, but most of the impacts will be felt after the second quarter.

Operator, Operator

Your next question comes from Tina Hou with Goldman Sachs.

Tina Hou, Analyst

My first question is about the plan for expanding the new store sales network. We had initially aimed to open 400 new stores this year, but I would like to know what the target number is now with our new strategy. Also, can you share the distribution between city center stores and suburban stores? What considerations do you have regarding different city tiers?

Liangjun Zou, Senior Vice President

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

Operator, Operator

Your next question comes from Yingbo Xu with Latex.

Yingbo Xu, Analyst

I have two questions. The first one is about the autonomous algorithm and its differences. What is the outlook for this autonomy in the future? The second question pertains to our product plans for pure electric vehicles later this year and next year.

Xiang Li, CEO

Regarding the question on city NOA, there are three main approaches: completely dependent on HD maps, partially independent, and fully independent of HD maps. A completely independent solution is the most difficult because it does not rely on the coverage and update frequency of high-definition maps or navigational coverage. Our aim is to launch a fully autonomous, HD map-independent AD Max solution for all users in the third quarter of this year for city NOA. Essentially, fully independent solutions represent true artificial intelligence in autonomous driving, using data-driven models to replicate human behavior instead of depending on entirely rule-based solutions. Tesla's strategy for end-to-end big models is rooted in data-driven solutions. While it's easy to agree on this conceptual approach, executing it demands substantial data and computational power, which not all automotive companies can provide. Consequently, we believe that different companies will select one of those three approaches based on their circumstances and capabilities. These varying choices will result in distinct products and different value for users.

Yingbo Xu, Analyst

The second question pertains to our pure BEV product. First, we will not be launching our BEV SUV this year. The latest plan is to introduce it in the first half of next year. This delay is primarily due to our belief that in order to sell premium BEV SUVs, we need a sufficient number of branded charging stations, comparable to Tesla's in China. Additionally, another constraint is the number of parking spots in stores for displaying inventory. This is essential for selling across various price points and ensuring consistent sales of over 10,000 units per model. We require an extra 500 to 600 display spots nationwide. Otherwise, we'll be increasing our product offerings rather than our sales volume. This challenge was evident with the L8 model, which faced issues because of a 40% decrease in display spots. However, we are recovering from that and are increasing the display spots for the L8. To sum up, adequate charging stations and additional display spots are two vital conditions for selling our BEV SUV product, and we believe we will meet these conditions in the first half of next year.

Operator, Operator

Your next question comes from Paul Gong with UBS.

Paul Gong, Analyst

I have two questions. First, will you create dedicated brands or channels for your complete product line within the BEV category? The second question is, with your significant cash reserve and the recent movement in your share price, will you think about share buybacks in the future?

Liangjun Zou, Senior Vice President

This is James. I will take your first question. Regarding the BEV and our REV models, we will stick to our direct sales model in the domestic market. We will strive to showcase all of our products in our retail stores and showrooms. Meanwhile, we have initiated internal discussions on differentiated retail strategies, and we may launch some innovative pilot programs in the future. We will share further relevant details in due course.

Tie Li, CFO

For the share buyback, we currently do not have a set plan. We will continue to assess based on the company's financial position, capital market conditions, and other cash needs.

Operator, Operator

Your next question comes from Yuqian Ding with HSBC.

Yuqian Ding, Analyst

I have two questions. The first is about our growth expectation, especially since our total addressable market mainly consists of family users who are predominantly middle class, a demographic that appears to be declining. Is the anticipated growth based on an expanding total addressable market or in relation to competition against peers offering products above RMB 200,000? The second question is whether the company is considering exploring opportunities in overseas markets where pricing and competition seem more favorable, particularly as global OEMs are increasingly moving towards hybrid solutions where range extenders could be viable options.

Xiang Li, CEO

For our first question, we will continue to focus on the NEV vehicle market priced over RMB 200,000 for family users. This focus will persist in the mid to long term because we strongly believe there is still much potential in the market regarding product offerings. There are many areas where we can improve our services and create long-term value for our users.

Liangjun Zou, Senior Vice President

Okay. I'll take your second question. As our Li Auto vehicle models gain popularity overseas, we will accelerate the establishment of our aftersales servicing networks to provide the best service experience for our international users. We aim to build aftersales service networks in international markets where we already have an established user base. We intend to establish our aftersales service network in Central Asia and the Middle East this year, which is currently in progress. We will select suitable dealers for market expansion in overseas countries and regions outside Western Europe and North America. Given this year's adjusted sales target, our focus will remain on the domestic market. We will share more details in due course.

Operator, Operator

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

Ming-Hsun Lee, Analyst

Recently, there have been media reports about the company's organizational changes. What is your strategy for this reorganization and which departments or areas will you allocate more resources for development?

Xiang Li, CEO

In our recent organizational restructuring, one significant change is the establishment of a new department called quality operations. The rationale for this change is to allow our business units to concentrate on high-quality decision-making and operational efficiency rather than merely following processes. Usually, an organizational change takes about 12 to 24 months to yield tangible results. Therefore, we believe a good time to evaluate would be around 2025 or 2026.

Ming-Hsun Lee, Analyst

This year, we can see Li Auto's development in NOA is accelerating. Right now, how important do you think NOA is for your customer base? If full self-driving becomes available in China, how might that change consumer behavior? Furthermore, if some auto companies lack NOA functionalities in their vehicles, will they still be able to sell their cars?

Xiang Li, CEO

First, we firmly believe that NOA makes travel easier and safer for our users. We have observed, particularly with the recent release of our mapless NOA beta version in May, that feedback from our initial user group indicates that over 65% of their total mileage was driven using city NOA. This penetration rate serves as strong evidence of NOA's acceptance among our user base. Regarding Tesla's FSD v12, we believe the next phase of competition among smart electric vehicles will focus on autonomous driving features, which will be a crucial consideration for users when purchasing cars. As FSD v12 becomes available in China, we anticipate that users will increasingly prioritize autonomous driving functionalities and experiences. This will further highlight the need for industry standards and the technological advancement within the automotive sector, prompting various car companies to invest more in enhancing the performance of their NOA features.

Operator, Operator

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

Janet Chang, Investor Relations Director

Thank you once again for joining us today. If you have any further questions, please feel free to contact Li Auto's Investor Relations team. That's all for today, you may now disconnect your lines. Thank you.