NIO Inc. Q1 FY2022 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated’s First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I'll now turn the call over to your host, Ms. Eve Tang from Capital Markets. Please go ahead, Eve.

Good morning and good evening, everyone. Welcome to NIO's First Quarter 2022 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 the Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, Senior Vice President of Finance; and Ms. Jade Wei, Vice President of Capital Markets. 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 and the Stock Exchange of Hong Kong 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 the news 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.

Hello, everyone. Thank you for joining NIO's First Quarter 2022 Earnings Conference Call. In the first quarter of 2022, we delivered 25,768 premium smart electric vehicles, another record quarter with a growth of 37.6% year-over-year. Since the second half of March, a new wave of coronavirus outbreaks in certain regions in China has impacted our vehicle production and deliveries. In April and May, we delivered 5,074 and 7,024 vehicles, respectively. Starting from June, while the supply chain and the vehicle production have basically returned to normal, our vehicle deliveries have also gotten back on track in Shanghai and several other important markets. We will continue to work closely with our supply chain partners to further improve the overall supply chain production capacity and accelerate vehicle delivery. We expect the total delivery in the second quarter of 2022 to be between 23,000 to 25,000 units. Despite the outbreak, our products have continued to witness robust demand. Our order intake stayed strong, especially for ET7 and reached a new high in May. We believe the launch of new products will drive continuous order growth. In the meantime, governments at all levels in China have also introduced positive policies to encourage vehicle consumption and the purchase of electric vehicles. This will further promote the upgrading and new purchase of premium smart electric vehicles. Going forward, we will further increase the overall supply chain production capacity and we are confident of ramping up our deliveries at a much faster pace in the second half of this year. In terms of vehicle gross margin, the whole industry is faced with the rising cost of batteries from materials and chips, which has also affected our vehicle margin. In the first quarter, our vehicle margin stood at 18.1%. As the battery cost continued to surge and peaked in April, the vehicle margin in the second quarter will be under even higher pressure. To mitigate the impact of the rising material costs, we have taken a series of countermeasures such as adjusting product prices. With the deliveries of new products, higher revenue per vehicle, and increasing production output, we expect the vehicle margin to start bouncing back from the third quarter. On May 20, 2022, NIO was listed on the Main Board of the Singapore Exchange, which marks another important milestone for NIO. With that, we have further enhanced our footing in the global capital markets, which led us to better connect with investors and serve investors from around the world. It is also of great significance for our global business development. In addition, according to the announcement made by the Hang Seng Indexes Co. Limited, NIO will be included in the Hang Seng TECH Index and the Hang Seng Composite Index starting from June 13. Next, I would like to share with you some updates on our recent operations and R&D. Research and development of new products and core technologies have been one of NIO's long-term strategic focuses. We have been making positive progress on various related fronts. On March 28, we started to deliver ET7 with extraordinary handling, and the riding experience has been well recognized by users and the media. Since the delivery of ET7, we have made fast iterations and released more smart features via portal updates on a continuous basis. We have introduced over 200 new features on the NT2.0 platform with the next-generation voice interaction and emotion engine technologies. NOMI's interactive experience is comprehensively upgraded. The driver assistance system powered by NIO's full stack in-house algorithm has achieved outstanding performance in external reviews and technology assessments. In the third quarter, we will release NOP plus based on the HD Map co-developed with our partner, enabled by the powerful software and hardware platform, full-stack in-house algorithm, and end-to-end pursuit data collection and operations capabilities. NT2.0 is capable of fast iteration and upgrades, laying a solid foundation for releasing NEV services in more scenarios and providing the autonomous driving experience beyond expectations. On April 29, the first ET5 tooling trial builds rolled off the production line in F2 at NeoPark. The team is working towards the final stage of mass production of ET5, and the delivery is expected to start this September. This month, we will unveil ES7, a brand-new, mid-to-large, five-seater SUV based on the NT2.0, and we'll start the delivery in late August. We will continue to step up our investments in battery-related technologies as well. As of now, we have over 400 employees working on battery-related technologies, including battery materials, cell and pack design, battery management systems, and manufacturing processes. We aim to build and enhance our comprehensive battery R&D and industrialization capabilities to improve the competitiveness and profitability of our products in the long run. With regards to production, F1 has fully resumed capacity to the level before the recent outbreak. In addition, we will further ramp up the production output on a gradual basis to support the mass production of the new products. NIO F2 at NeoPark has completed the production line installation and tooling and has entered into the production validation phase. It will be put into operation from the third quarter this year. It only took us 12 months from kicking off construction to rolling off the first tooling trial build in F2, which is a record construction speed in the industry. In terms of the sales and service network, we now have 381 new houses and new spaces in 152 cities, as well as 247 new service centers and delivery centers in 149 cities worldwide. With regards to the charging and swapping network, we've installed over 960 battery swapping stations in 197 cities. So far, we have 829 supercharging stations and 1,140 destination chargers. The continued deployment of our sales, service, and power network will bring long-term benefits to our brand awareness, user satisfaction rate, and sales growth. With respect to the global market, while further expanding our sales and service network and improving user satisfaction in Norway, our teams have been accelerating preparations to launch our products and services in Germany, the Netherlands, Sweden, and Denmark. In terms of our mass market brands, our product development and production preparation are in steady progress. On May 10, NIO signed a strategic cooperation agreement with Hefei on the second phase of the vehicle production plant and the facilities for key components at NeoPark. The agreement marks the start of the planning and preparation for the production capacity of the new brand. NIO's adjacent strong vision fueled with the blue sky. We are fully committed to making continuous investments in environmental protection and social welfare and contributing to global sustainable development. Since we announced the Clean Parks, a global ecosystem construction initiative last December, NIO has been actively cooperating with several organizations to roll out various projects to support national parks and natural reserves. On April 22, NIO reached a strategic cooperation with the Worldwide Fund for Nature, who has joined hands with us in establishing a clean and low-carbon energy system in national parks and natural reserves in China and beyond. Although we faced many challenges in the first half of 2022, 2022 is still a critical year for NIO to make committed investments and efforts in new products, core technologies, global market entry, and the mass market brand. In the second half of this year, we will accelerate our new product delivery and capacity expansion. We are confident of and look forward to realizing satisfying results in 2022. As always, thank you for your support. With that, I will now turn the call over to Steven to provide the financial details for the quarter. Steven, please go ahead.

Thank you, William. I will now go over our key financial results for the first quarter of 2022. And to be mindful of the length of this call, I will refer 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 first quarter were RMB9.9 billion, representing an increase of 24.2% year-over-year and remained stable quarter-over-quarter. Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sales in the first quarter were RMB9.2 billion, representing an increase of 24.8% year-over-year and remained relatively stable quarter-over-quarter. The increase in vehicle sales year-over-year was mainly attributed to higher delivery. Other sales in the first quarter were RMB0.7 billion, representing an increase of 15.6% year-over-year and remained relatively stable quarter-over-quarter. The increase in other sales year-over-year was mainly attributed to the increased sales of service and energy packages and others in line with the incremental vehicle sales in the first quarter of 2022, which was partially offset by a decrease in revenue from battery upgrade services. Gross margin in the first quarter was 14.6% compared with 19.5% in the first quarter of 2021 and 17.2% in the fourth quarter of 2021. The decrease in gross margin year-over-year was mainly attributed to the decrease in vehicle margin and reduction in other sales margins resulting from expanded investment in our service network. The decrease in gross margin quarter-over-quarter was mainly attributed to the decrease in vehicle margin. More specifically, vehicle margin in the first quarter was 18.1% compared with 21.2% in the first quarter of 2021 and 20.9% in the fourth quarter of 2021. The decrease in vehicle margin year-over-year was mainly driven by the lower average selling price due to changes in our product mix. The decrease in vehicle margin quarter-over-quarter was mainly attributed to the increased battery cost per unit. R&D expenses in the first quarter were RMB1.76 billion, representing an increase of 156% year-over-year and remained stable quarter-over-quarter. The increase in R&D expenses year-over-year was mainly attributed to the increased personnel costs in research and development functions as well as for incremental design and development costs for new products and technologies. G&A expenses in the first quarter were RMB2.01 billion, an increase of 68.3% year-over-year and a decrease of 14.6% quarter-over-quarter. The increase in SG&A expenses year-over-year was primarily due to the increase in personnel costs in sales and service functions and costs related to the sales and service network expansion. The decrease in SG&A expenses quarter-over-quarter is mainly attributed to the decrease in marketing and promotion expenses incurred from the hosting of NIO Day in December 2021 as well as the decrease in professional services expenses. Loss from operations in the first quarter was RMB2.19 billion, representing an increase of 639.7% year-over-year and a decrease of 10.5% quarter-over-quarter. Net loss in the first quarter was RMB1.78 billion, representing an increase of 295.3% year-over-year and a decrease of 16.8% quarter-over-quarter. Net loss attributable to NIO's ordinary shareholders in the first quarter was RMB1.83 billion, representing a decrease of 62.6% year-over-year and a decrease of 16.3% quarter-over-quarter. Our balance of cash and cash equivalents, restricted cash, and short-term investments was RMB53.3 billion as of March 31, 2022. Now this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from the line of Jeff Chung from Citi. Please ask your question.

So I have two questions. One is the second quarter GP margin outlook. So it looked like the high-margin products as a percentage of sales in the second quarter could reach about 37% versus 17% in the first quarter. I think this is one of the positives that may potentially lift up the GP margin trend. And secondly is that there has been some MSRP hike recently. And we would like to know how much of the sales volume from the second quarter has been a price hike versus the first quarter. Obviously, this is the first question. And the second question is that our new model cycle suggests that our current aging products, three products, are going to turn into six new products in the next 6 to 12 months. So my question is whether the third-quarter production capacity can reach above 48,000 units since, by referring to Tesla, we saw a strong week-on-week and month-on-month recovery from the past weeks. And my understanding is that a lot of our supply, auto part suppliers are overlapped with Tesla. So, if Tesla recovers fast, would that mean that we are going to enjoy a similar pace into June and the third quarter?

Thank you for your question, Jeff. Starting from April, we actually updated our agreement with our battery supplier CATL. Right now, our battery cost is connected with the raw material indexes. So basically, it means that if in the second quarter we see the battery costs significantly increase compared with that of the first quarter, this is going to affect our vehicle gross margin performance, but there's going to be some latencies. The battery prices increase in the prior month will be reflected in the battery cost of later months and this will incorporate into our bigger gross margin performance. According to the current forecast and market trend, we see the battery cost is going down a little bit starting from May, and we have also taken some measures, for example, increasing our product prices. This is going to help us improve our performance in the third quarter. Right now, we are still delivering vehicles without the price adjustment and we expect to start delivering the vehicles with the price adjustment starting from the third quarter because our business model is made to order or order to delivery. So just now you also mentioned that our products with higher gross margin are also going to kick in terms of the performance of the vehicle gross margin. Just as the ET7 that is launched in the second quarter, we expect the production of ET7 is going to gradually ramp up starting from June. Then starting from the third quarter, it is going to maintain a normal level. Overall, we believe our vehicle gross margin is going to face higher pressure in the second quarter. This is mainly due to the battery cost impact. The vehicle gross margin of the second quarter is going to be lower compared with that of the first quarter. However, with the price adjustment, we expect to start delivering the vehicles with higher prices starting from the third quarter, which is going to contribute positively to our vehicle gross margin. With the production capacity expansion in the F1, we expect this to start to improve the overall production output starting from June. Of course, it will need some time to gradually ramp up the production, but we believe vehicle production is not going to be a bottleneck. The demand is not an issue for us. The main challenges we are facing right now is the supply chain, especially in terms of the chipset and the production capacity of our suppliers. We are very confident in our delivery performance starting from the third quarter.

Thank you. Our next question comes from Tim Hsiao from Morgan Stanley. Please ask your question.

So let me translate my questions. The first question is about orders. Could you please provide further details? Do orders for ET7 dominate the current order intake while the demand for carbon SUVs are falling more significantly? And will we have any updates on our current SUV model any time soon? You mentioned the record order book; does that include the orders of ET5? My second question is about batteries. During the presentation, William mentioned NIO now has more than 400 battery-related technologies covering cell, pack, BMS, and more. Will NIO consider evolving more in battery production over time? Or will you seek help from battery OEM vendors to produce batteries based on NIO's patents and technology? So those are my two questions. Thank you.

Thank you, Tim, for your question. Regarding your first question about orders, in May, our order growth was quite significant and this actually includes the order intake for the existing ES8, ES6, and EC6. The overall order intake performance of the existing ES8, ES6, and EC6 is quite steady, and we have witnessed some growth. You also mentioned whether we are planning for upgrades of our existing models? We are planning to incorporate some smart hardware and new software features in the upgraded versions of the existing models. After we launched the ET5 during last year's NIO Day, we have witnessed steady growth in order intake. Recently, because of the auto shows and exhibitions, we observed very positive order performance for ET5. Regarding the 400, this actually refers to our R&D teams focusing on battery technologies. We have over 400 employees. For this, we plan to leverage our R&D capabilities in terms of the battery to launch an 800-volt high-voltage battery pack, which will also support the battery swapping technologies in 2024. We understand that this will bring many innovative technologies and revolutionary solutions. We believe that this unified pack concept is going to redefine the battery technologies in terms of cost and safety. Our plan right now is to start the production of this new next-generation battery pack in the second half of 2024. Our long-term battery strategy will be a combination of in-house production and outsourcing. We believe that this long-term strategy will benefit the overall competitiveness and vehicle gross margin as well as the profitability of NIO's products.

Thank you. Our next question comes from Bin Wang from Credit Suisse. Please ask your question.

I actually want to quantify the margin because you said that the second quarter will be a low margin. Can you say what's the level of the decline in margin because you actually raised the price for current products by around RMB10,000? Can you notice the decline in the gross profit margin across products just from RMB10,000? You also mentioned that in the third quarter, we're back to normal. What's the back to normal referring to? Are you referring to an 18% gross margin in the first quarter or an after-peak level of around 21%? Meanwhile, I suppose you will further increase the price for the upcoming battery semiconductor intention corporate version of content product. Will that lead to another increase in the gross margin?

Thank you, Bin, for your question. Regarding the price increases for our products, I have previously explained that this will be reflected in our vehicle gross margin in the third quarter because we are still delivering vehicles without the adjusted price. For the second quarter, the battery cost is higher than that of the first quarter, but the impact of this is still uncertain. Specifically, we believe it's going to be higher than the RMB10,000 you have just mentioned. However, there are many uncertainties that we still need to weigh a little bit because, as I mentioned, right now, the battery cost of products is actually based on raw material trends and indexes. So for the third quarter, we will probably see some trends of the raw material cost going down a little bit. With our vehicle gross margin improvement based on the new technology platform 2.0, we believe the vehicle gross margin in the third quarter will bounce back. However, there are still many uncertainties because the battery cost is very difficult to forecast and to determine at this moment.

Thank you. Our next question comes from the line of Ming-Hsun Lee from Bank of America. Please ask your question.

My first question, could you also give us some guidance regarding your potential product pipeline for 2023, especially for the A66. Will you consider launching the new generation next year? Second question is regarding your services and other businesses. First, revenue growth is kind of Q-on-Q; is it because of the COVID impact? Secondly, the gross margin of this business is also not very good for the quarter. Is this also because of lower utilization when building a new battery swap station? What do we expect for margin improvement in this business?

Thank you, Ming, for your question. Of course, for the existing models, including the ES8, ES6, and EC6, our plan is to upgrade all those models to the new technology platform next year.

Ming, this is Stanley. The other operating loss mainly comes from the increase in depreciation and operating expenses related to our power swap stations. This year, we will continue to build the battery charging and swapping network, which can bring a unique experience to our users and can benefit further improvement of our user satisfaction and brand image. So from a short term, I think the other losses will increase along with the expansion of the network. In the long run, as the numbers of deliveries and users grow, we will make our charging and swapping services more efficient. The losses arising from the charging and swapping service will gradually narrow down. Our innovative business models, including NIO Life and ADAS, can also bring extra gross profit and be booked in this account. Thanks, Ming.

Thank you. The next question comes from Nick Lai from JPMorgan. Please ask your question.

Let me explain very quickly my two questions. First is regarding supply chain. Can you give us an update on supply condition in June as well as the second half, as well as the pricing with battery suppliers? Has the recent price hike reflected cost increases in the first half? Will battery costs continue to rise in the second half? Are we going to revise our prices again in the second half as well? Second, a quick update on our mid-market brand strategy? Thank you.

Yes. Thank you for your question. There are many uncertainties in terms of the chip supply because in our vehicle we probably have over 1,000 chips, and the chip shortage situation for those 1,000 chips may vary from time to time. This depends on the upstream suppliers of the Tier 1 suppliers of NIO. Many of the chip shortages are caused by the basic chipsets used by those Tier 1 suppliers or the upstream suppliers of those Tier 1 suppliers. For example, like Texas Instruments and Infineon, they provide various kinds of chips to OEMs, and it is very difficult to identify specific risky chips that we are going to face shortages of. That is why we have a risky chip list. Generally, it includes around 1 to 20 different kinds of chips, and this list may change month to month. Of course, we will try to mitigate all those risks with different kinds of measures. Previously, our plan was to expand production capacity starting from the second half of this year. So that is why starting from last year, we have already begun to work closely with all our suppliers to ensure we can secure sufficient supplies for our products. We have some risks in terms of chip supply, but we believe this is manageable and under control. Regarding the production capacity in June, this is not specifically related to chip shortage or other supply chain issues because this is just a part of the normal ramp-up process for production capacity expansion. As for the battery, starting from April, our battery cost is linked to the raw materials of the batteries in the market. We see that raw material costs peaked in April, and we started to see some trends going down, specifically for lithium carbonate. In China, we have started to see more resources for lithium, and some companies are trying to mine lithium to supply the market and meet the demand. So I believe the general consensus of the industry already peaked in April. It's gradually going down, but opinions vary on what the final cost of those raw materials will be. Some may think lithium carbonate will go down to around 30,000 per ton, which means we could see a reduction in lithium carbonate costs by 20% to 30%. We have a similar forecast for nickel material as well. So we believe the general trend is that battery material costs are going down, but they are not expected to rise again. The next question is about our mass market brand. Our plan is to start the delivery of mass market brand products starting from the second half of 2024. This product will be based on the new technology platform 3.0. We believe the mainstream products of the mass market brand will be priced between 200,000 to 300,000. This platform will also support battery swapping, and we are going to use our in-house development to manufacture batteries for mass market brand products. Of course, this platform is going to support high-voltage technologies, and we believe with all those advanced technologies and competitive pricing, products under the mass market brand will be highly competitive.

Thank you. Our next question comes from Paul Gong from UBS. Please ask your question.

Let me translate my questions. The first question is related to ES7. Why from unveiling launch until delivery, it seems to be a lot faster than the previous ET7 or ET5? How do you think about the cannibalization versus ES8, ES6, and EC6, given they are all kind of SUVs of similar size? My second question is regarding the supply chain preparation for the NT.2 platform. Currently, it seems that the ET7 production remains relatively slow in terms of volume with pretty long waiting periods. In view, we are going to have an ET5 with major volume and ES7 in the pipeline. Have we done enough work to secure the key components supply to enable the ramp-up of NT.2 platform models?

Thank you, Paul, for your question. Regarding your first question, we have always been working on the development of our new products, and we have been working on the development of the ES7 for some time. The launch time of the ES7 is actually already planned when we were developing the product. It may seem right now very close to the delivery of the ES7, but previously our plan was to launch the ES7 earlier. Due to the impact of COVID-19, it was delayed a little bit. That is why it seems that it is much closer to the actual delivery of the ES7. However, everything is going forward according to our plan. The ES7 is going to be based on the new technology platform 2.0, which is going to offer higher and smarter technologies compared to the current NT.1 technology platform. Therefore, the existing ES8, ES6, and EC6 are based on the NT.1 technology platform. There will also be some price differences. The pricing of the ES7 will be positioned between that of the ES8 and ES6. We believe there will not be cannibalization between the ES7 and the existing models because we have different positioning and pricing strategies for those products. For example, the ES8 mainly focuses on the six-seater and seven-seater markets, while the ES7 is positioned as a mid-to-large, five-seater SUV that has a higher price compared to the ES6. Regarding your second question, of course, we have already started planning for the production ramp-up of products based on the NT.2 platform at a very early stage. As we have planned ahead, we believe the risks remain manageable.

Thank you. Our next question comes from Yuqian Ding from HSBC. Please go ahead.

So I've got two questions. First is to ask about whether our price hike in May is enough to cover the cost headwind from the battery side, aluminum body, and also the chip alignment in the channel? What's the management's thoughts about the actual cost and pricing strategy coming forward? Second question is to ask about ET5 volume and margin conviction. We know there's a bit of splashing in the entry luxury segment, which ET7 is currently located within. Also, previously, we have designed for a 20% margin above. But back in time, we might not have considered that the cost headwinds from the commodity side might persist longer.

What are the management's thoughts on the actual cost and pricing strategy moving forward? Additionally, can you provide insights on the ET5 volume and margin conviction? We understand there is some disruption in the entry luxury segment where the ET7 is positioned. Previously, we had designed for a 20% margin, but we may not have anticipated that the cost pressures from commodities could last longer.

Yuqian, this is Stanley. Regarding the cost increase of batteries, I think William has given us a lot of guidance. Regarding the price increases of other materials and also chip costs, I think we have absorbed this through close cooperation with our partners and internal efficiency improvements. As mentioned previously, the whole market for key raw materials is quite dynamic. At this moment, we cannot give a precise estimation of the following months or quarters in terms of the trend. So, for the second question, William.

For the ET5, because we have already accumulated a significant amount of reservation orders, we believe, for this year, the production of ET5 will only be sufficient to meet the backlog for ET5 orders. Therefore, this price increase of the ET5 will not impact our vehicle gross margin performance this year.

Thank you. Our next question comes from Vijay Rakesh from Mizuho. Please ask your question.

I have two quick questions. On your in-house capacity with Hefei, you have talked about a 240,000 annual capacity. Do you think you can reach that 20,000 a month run rate by end of Q3 of this year? And the second question is on NeoPark, which obviously has an incremental additional 300,000 per year capacity. You talked about ramping starting that in Q3. Can you walk through how that ramp should look? Will it be like 10,000 a month exiting this year and then gradually increase next year? That's it.

I have two quick questions. Regarding your in-house capacity at Hefei, you've mentioned a target of 240,000 annually. Do you believe you can achieve a monthly run rate of 20,000 by the end of Q3 this year? Additionally, I want to ask about NeoPark, which has an extra capacity of 300,000 per year. You stated that ramping up will begin in Q3. Can you explain what that ramp-up will entail? Will it start at 10,000 per month by the end of this year and then gradually increase next year? Thank you.

Okay, Vijay, thanks for your question. For the production capacity of our first plant with JAC-NIO, as we have mentioned, we will continue to ramp up its production capacity in Q3. I think probably at least in the second half of the year, our overall plant capacity should reach 20,000 units per month. It shouldn't be too hard for us to see when. For F2's ramp-up pace, actually, first, we will kick off the delivery of ET5 from this plant in Q3. So it will start production in Q3, and we aim to reach 10,000 units within a short period, probably three to four months. I think that's our plan. Of course, next year, as we introduce more models into this factory, the overall production volume of F2 will continue to rise.

Thank you. Our next question comes from Xing Chang from CICC. Please ask your question.

My first question is about it was reported that in May we have relevant recruitment information in the United States. Can you share more details about it? How do you see the breakthroughs in overseas markets? Which potential market do you think has more potential for us to deploy in, and what are the difficulties? My second question is about NAD. Can you share more details about its current testing progress?

My first question is regarding the recruitment information reported in May in the United States. Can you provide more details about it? How do you perceive the breakthroughs in overseas markets? Which market do you think holds the most potential for us to expand into, and what challenges do you foresee? My second question concerns NAD. Can you update us on its current testing progress?

Okay. And Chang Xing, thank you for your question. So first, with regard to the U.S. market, the short answer is we'll definitely enter the U.S. market. Actually, we've started a comprehensive study of the U.S. market and have a dedicated team in charge of the business plan for the market. We're approaching the U.S. market with an innovative manner, but it’s still in the study phase, so we will share more information when it's appropriate. Also, regarding the differences in the European market, there is a lot of energy between China and the European market from the bus model to the aspiration for green smart EV products. Norwegian users also enjoy the concept of smart EV and even the pricing. However, if we need to name some differences, first, the culture and also the cost structure. In Europe, delivery costs would be higher. We need to accumulate enough understanding of the local culture and integrate into the local community.

Regarding NAD, the current ADAS functions and features based on the NIO technology platform 2.0 are derived from the full-stack technologies developed in-house by our own AD teams. We have comprehensive full-stack capabilities, starting from sensing algorithms to control strategies. Since the delivery of ET7 on March 28, we have witnessed data closed-loop management and collection, helping us to achieve fast iterations and upgrades of the vehicle's autonomous driving or ADAS features based on NT.2. Over the last two months, we've seen significant improvements because we can collect data to train our algorithms and enhance our ADAS and AD technologies. As I mentioned, we are going to release NOP plus. We are very confident in the performance of NOP plus. NOP plus will be based on the high-definition map developed together with Tencent, creating an in-house high-definition map. We will integrate various technologies, including the high-definition map, with our AD and ADAS closed-loop data management. This gives us confidence in NAD performance in the long run based on our sensing capabilities, closed-loop data management, and fast iterations.

Thank you very much for all your questions. We have reached the end of the question-and-answer session. I'll now turn the call back to the management team for 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.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.