Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated’s First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations of the company. Please go ahead, Rui.

Good morning, and good evening, everyone. Welcome to NIO's first quarter 2024 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; and Ms. Stanley Qu, Senior Vice President of Finance. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission, the 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 non-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 Q1 2024 earnings call. In Q1, NIO delivered 30,053 premium smart EVs. In Q2, thanks to the launch of all model year products, the unleashing of sales capabilities, together with a more flexible sales policy, NIO's deliveries started to pick up month by month. In April, NIO delivered 15,620 vehicles and in May, 20,544 vehicles. Our market share in the premium BEV segment continued to grow, with year-over-year growth far above the segment average. The total deliveries in Q2 are expected to be between 54,000 and 56,000 units, up 129.6% to 138.1% year-over-year. In terms of NIO's financial performance, despite the product transition in Q1, the vehicle margin was 9.2%. In the meantime, with the improvement in the utilization of the charging and swapping facilities, and in the profitability of the after-sales services, the gross loss from other sales was greatly reduced quarter-over-quarter. Now I would like to share with you the recent highlights of our products, R&D and operations. On April 25, the ET7 executive edition was launched at the Beijing Auto Show. The delivery of this executive sedan started in late April. With all-around upgrades, the 2024 NIO ET7 batch caters to the needs of the business community. It is well placed to compete with premium electric models, especially ICE models such as BMW 5 Series, Audi A6, and the Mercedes E-Class. As for NAD, on April 30, we began pushing urban NOP Plus to all end users, making it the largest release of its kind, currently available to more than 265 end users and covering over 1.4 million kilometers of highway and urban street across 726 cities in China. NOP Plus has become an industry leader in terms of its user base and coverage. During the Labor Day holiday, 48.1% of the total mileage was driven with NOP Plus, making user journeys safer and more relaxing. Since day one, NIO has developed a clear brand roadmap starting from the premium segment to build up skills and experience, and then introducing a mass-market brand to reach and serve more users. This will enable us to make greater contributions to a more sustainable future. On May 15, during the International Day of Family, we introduced ONVO, a new brand for the mainstream family market. ONVO is a form, translating to 'Path to Happiness.' Our mission with ONVO is to enhance family life by delivering products with ultimate experience value and optimal ownership cost. The preorder of its first product, L60, has begun. The L60 is a smart electric mid-sized SUV, with the official product launch and delivery scheduled for September. The launch of ONVO shapes us into a higher scale, expanding our reach to a broader user base. As more people become aware of our technologies and products, we move closer to our vision of a Blue Sky Company. Regarding our sales and service network, NIO currently has 154 NIO houses, 388 NIO bases, 344 service centers, and 64 delivery centers. In terms of our charging and swapping network, NIO has established 2,472 power swap stations worldwide, providing over 45 million swaps. Furthermore, NIO has installed over 22,000 power chargers and destination chargers. Additionally, more industry players have joined NIO's charging and swapping network. As of now, we've partnered with several manufacturers to jointly expand the standard battery swapping network. More investors have recognized the value of NIO's charging and swapping business. On May 31, NIO Power signed a strategic investment agreement of RMB1.5 billion; with support from strategic investors, NIO will be able to further develop its core technologies and expand the network. On May 13, NIO was named in the 2024 Fortune China ESG Impact List. We continue to show social responsibility and lead by example in the ESG domain, further contributing to sustainable development worldwide. Despite fierce competition, our ongoing investment in technologies, products, and services has started to pay off, distinguishing us from competitors. NIO's premium brand positioning, industry-leading technologies, and innovative, chargeable, swappable, and upgradable power experience have gained recognition, driving a steady sales rebound. We will continue to enhance our software capabilities, optimize products and experiences, improve system capabilities, and operational efficiency to gain a larger market share. As the company implements its multi-brand strategy, we anticipate unlocking more growth potential. Thank you for your ongoing support. I will now turn the call over to Steven for Q1 financial details. Over to you, Steven.

Thank you, William. I will now go over our key financial results for the first quarter of 2024. To keep this brief, I will refer to amounts in RMB. I encourage listeners to refer to our earnings press release for additional details. Let's begin with revenue. For the first quarter of 2024, total revenues were RMB9.9 billion, down 7.2% year-over-year and 42.1% quarter-over-quarter. 85% of our revenue in Q1 came from vehicle sales, totaling RMB8.4 billion, down 9.1% year-over-year and 45.7% quarter-over-quarter. This year-over-year decrease was mainly attributed to a lower average selling price due to user rights adjustments since June 2023, along with decreased delivery volume. The quarter-over-quarter decrease is chiefly because of a 40% drop in delivery volume, affected by seasonal factors. Other sales were RMB1.5 billion, showing a 5.2% increase year-over-year, but down 8.2% quarter-over-quarter. The growth was primarily due to increased sales of parts, after-sales vehicle services, and professional power solutions which grew alongside our user base, partially offset by decreased revenue from used car sales and auto financing services. The quarter-over-quarter decrease was mainly attributed to lower used car sales. Next, let's look at the gross margin. Our overall gross margin was 4.9%, compared to 1.5% last year and 10.5% in the previous quarter. Changes in gross margin were primarily driven by vehicle margins. Vehicle margin in this quarter was 9.2%, up from 5.1% in Q1 2023 and down from 11.9% in Q4 2023. The year-over-year increase was mainly due to decreased material costs per unit. The quarter-over-quarter decrease stemmed from lower average selling prices due to increased promotions during the product transition and changes in product mix but was partially offset by decreased material costs. Moving on to the operating expenses, R&D expenses were RMB2.9 billion, declining by 6.9% year-over-year and 27.9% quarter-over-quarter, driven by decreased design, development costs, and reduced ethanol costs. SG&A expenses were RMB3 billion, which represents a year-over-year increase of 22.5% but decreased by 24.6% quarter-over-quarter. Year-over-year, the increase was primarily due to higher personnel costs related to sales functions, expanding the complete sales and service network, and greater sales and marketing activities. The quarter-over-quarter decrease was due to reduced sales and marketing activities and professional services, along with decreased personnel costs in corporate functions. Now, regarding the bottom line, loss from operations was RMB5.4 billion, increasing by 5.5% year-over-year but down by 18.6% quarter-over-quarter. Net loss was RMB5.2 billion, which is an increase of 9.4% year-over-year but a decrease of 3.4% quarter-over-quarter. Finally, our combined balance of cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits was RMB45.3 billion as of March 31, 2024. For more information and details of our Q1 2024 financial results, please refer to our earnings press release. This concludes our prepared remarks. I will now turn the call back to the operator for our Q&A session.

Thank you. Your first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Hello and thanks for taking my questions and congratulations on the good feedback on ONVO and also some strategic breakthroughs for NIO Power. I have two questions. The first question is about the gross profit margin because, as we remember, the company previously guided that vehicle gross profit margin would return to the mid-teens as the strategic focus of the NIO brand is profitability and cash generation, while ONVO would aim for volume. However, we saw increasing promotion for the NIO brand in April and May, which actually boosted the volume. Will management consider continuing such more aggressive promotion on the NIO brand for better volume in the upcoming months? And do we need to revise down our vehicle margin expectations? That's my first question.

Thank you, Tim. I will ask Stanley to answer the first question.

I think regarding the gross margin, actually, we upgraded our NT2 product to the 2024 version starting in March. During the transition period of the model year product change, more promotions were offered to customers, leading to a decrease in our average selling price in Q1. Additionally, more lower-margin models like the ET5 and ET5T were sold in Q1. All these factors contributed to the decrease in our gross margin. As you mentioned, we delivered over 20,000 vehicles to users in May, and with the recovery of sales volume, we will further optimize our product mix and negotiate with our supply chain partners for greater cost efficiency in the following months. Thus, we expect the vehicle margin to return to double digits in Q2 and continue improving in Q3 and Q4. However, considering the intensifying market competition, we will also remain flexible on sales policy to ensure our market position is secure. Thank you, Tim.

Thank you. That's very clear. Thanks for sharing all the details. My second question is about NIO Power. As William just mentioned, NIO Power has secured the first external strategic investment of RMB1.5 billion, or around $200 million. Looking forward, will NIO Power seek more funding from other carmakers in the battery swap alliance? Separately, aside from NIO Power, are there any other business units within the group that could seek external capital injection and potentially be carved out? Could the management team provide some examples? That's my second question. Thank you.

Thank you for the question. We have just completed the first round of fundraising for NIO Power. After this financing round, NIO retains around 90% equity in NIO Power, which is now open to external investors, including car companies and individuals. We believe that NIO Power has financial sustainability and a positive outlook for the future. Initially, building the network for the power swap facilities required significant upfront investment. However, we have a clear roadmap to profitability for NIO Power. Currently, the breakeven point for a single power substation is around 60 swaps per day. Our average daily swaps are around 100,000 across 2,000 stations, which means each station averages about 30 swaps per day. Therefore, we believe we have a viable roadmap for sustainability and profitability in our power swap business, and we can also benefit from revenues generated by energy storage and flexible battery upgrades within the power swap model. Thank you, Tim.

Thank you. Your next question comes from Ming-Hsun Lee from Bank of America. Please go ahead.

William and the management team, this is Ming-Hsun from Bank of America. My first question is regarding the ONVO brand. We are now close to the end of the second quarter. Could you provide some guidance on your sales channel expansion and CapEx expenses related to the ONVO brand? Additionally, could you share a rough product pipeline for the ONVO brand? Thank you. That's my first question.

Thank you, Ming. Our current plan is to open around 100 stores in China when we launch and deliver the first product of ONVO in September this year. Capital expenditures for ONVO sales stores do not require heavy investment, as they won't include NIO houses. Therefore, overall capital expenditure will be efficient, around RMB1 million to RMB2 million per store, making it a manageable burden from a capital expenditure perspective.

Could you provide us with an outline of the product pipeline for the ONVO brand? For example, what can we expect this year and next year?

The first product of ONVO, the L60, will directly compete with the Model Y. It is a mid-sized SUV designed for families. Next year, we plan to introduce a second product from ONVO, which will be a mid-large SUV aimed at larger families. While we have additional products in development, ONVO will prioritize increasing market share and sales volume for each product rather than launching many models. The total sales volume for ONVO’s segment, which targets the family car market starting around RMB200,000, is approximately RMB4 million. We believe we have a significant opportunity and potential for growth in that segment. Thank you, Ming.

Thank you, William. My second question relates to your third brand. We read news today indicating that the Firefly brand could be launched or presented to the market by the end of this year. Could you also provide us with an update on the third brand? Last time during the earnings call, you mentioned that the Firefly brand products could be sold in new household spaces. Could you confirm this network strategy? Thank you.

Thank you for the question. Regarding our third brand, Firefly, research and development activities are progressing well. A few months ago, I tried one of the early builds of their first model, and it looks good. In the Chinese market, Firefly will target the compact vehicle segment, with its price range around RMB100,000 to RMB200,000, while maintaining high safety and quality standards. It will be a well-designed boutique car for the Chinese market. As for the sales channels, it will share the same point of sale with NIO, similar to how our other brands work with BMW. However, the selling price of the Firefly will be positioned lower than many products, reflecting its value. We will start delivering the product in the first half of next year. While we do not have a specific launch date yet, the delivery timeframe is more or less defined as the first half of next year.

Thank you, William.

Thank you. Your next question comes from Ben Wang from Deutsche Bank. Please go ahead.

Thank you. My question is about margin. As you will migrate to the NT3 this year, how much margin improvement can we expect through this technology upgrade as all NIO brand products transition from NT2 to NT3? At the same time, what is the volume requirement indicated for reaching overall company breakeven? That's my first question. Thank you.

Thank you for the question. Starting next year, we will gradually transition our products to the third generation, with the first product being the ET9. For the NT3 products, we will use various strategies to enhance vehicle margins, such as integrating more in-house technologies, like chips, to improve performance. We also anticipate opportunities for battery cost reductions. Our target for NT3 product margins will average around 20%, and we are confident in achieving that target. Regarding the breakeven target for the NIO brand, we aim for a monthly sales volume of 30,000 units with a vehicle margin of approximately 20%, which will allow us to break even with the core NIO brand in China. For our second brand, ONVO, we have announced a presale price during the brand launch but have not released the final price yet. However, even with the presale price, we can achieve a decent vehicle margin. We recognize that competition in the ONVO segment is more intense than in NIO, but we will balance volume and margin to ensure healthy business growth. Therefore, we expect ONVO to achieve a margin above or at least around 15%. To break even, ONVO will need to reach a monthly sales volume of 20,000 to 30,000 units.

Thank you. My second question pertains to the order backlog. You mentioned previously that you are excited about the initial order backlog for ONVO, and some market discussions indicate that you already have 60,000 cancelable orders. Can you comment on that number and how successful you feel about ONVO orders so far? Thank you.

Thank you, Ben. As you know, we do not disclose specific preorder intake or numbers since preorders are refundable and may not accurately reflect product performance metrics. However, it is true that our preorder intake has exceeded expectations, as mentioned by the President of ONVO in several interviews. Overall, we have received more preorder interest than we anticipated, especially considering we have yet to open any stores or launch products in the market; that’s all the information we can share. Thank you, Ben Wang.

Thank you. Your next question comes from Paul Gong from UBS. Please go ahead.

Thanks for taking my questions. I have two questions. The first question is, you mentioned that you currently have 2,400 swap stations. My understanding is that only the third-generation and latest battery swap stations can facilitate swapping for ONVO. Could you remind us how many units of the later generation battery swap stations are set for ONVO?

Thank you for the question. To make our third-generation power substations compatible with ONVO’s products, we need to make some modifications, which will cost between RMB200,000 and RMB300,000 per station. We have already installed over 1,000 third-generation power swap stations, providing a solid foundation. Next week, we will begin installing our fourth-generation power swap stations, which will work with both ONVO and new products. We will assess market demand to decide how many fourth-generation stations are necessary for NIO and ONVO products. All fourth-generation stations will support ONVO products, and by the end of the year, we expect to have more than 1,000 that are compatible with them. However, not every station will be modified for ONVO initially, as we do not anticipate a large user base in the first year. We also observe that the number of power swap stations correlates with population density in certain areas, which affects sales. For instance, half of our users are located in the Yangtze River Delta, where we have nearly 900 power swap stations. Therefore, we are working on a return on investment model to assess the performance of our power swap station investments.

Thank you. My second question concerns NIO's license permit. I believe you among the first to receive the NIO Autonomous Driving and testing license permit. How do you plan to utilize this opportunity, and how should you further develop autonomous driving technologies?

Thank you for the question. Yes, we recently received the L3 testing permit from various ministries, confirming our status as one of the first companies to achieve this recognition. This acknowledges our technology. With this permit, we can enhance communication with the government about applications and developments in higher levels of autonomous driving technologies, which is crucial for the whole industry.

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

Thank you, team. My first question revolves around the margin pricing. It seems like in the second quarter, we might see higher economic scale, almost doubling versus the first quarter. However, promotions and lower mix likely remain as dilution factors. You mentioned being flexible on pricing earlier. Could you provide some context on how you prioritize pricing, mix, and volume, and how each aspect will weigh on margins?

Thank you for the question. In April and May, we observed an increase in our sales volume due to several factors. First, we completed our model year face-lifts in the first quarter, which improved our product competitiveness. Second, we adjusted our battery-as-a-service policy. In March, we launched our long-life battery strategy along with an optimized monthly subscription fee through partnerships with battery suppliers. This has resulted in our take rate for Battery as a Service exceeding 80%. Moreover, time-limited promotions on this service have stimulated sales. Other contributing factors include enhanced sales capabilities and a greater recognition of the benefits of our swappable and upgradeable solutions. While our sales volume has grown, it's essential to note that we haven't cut prices, although we have provided some promotions. Additionally, we are optimistic about continually improving our vehicle margins. Starting in June, we are focusing on enhancing our product mix by prioritizing high-margin models. Ultimately, we aim to maintain steady sales volume while also optimizing vehicle margins.

Thank you for the comprehensive response. My next question is on the overseas business. With the EU's anti-subsidy investigation towards Chinese EVs likely to yield preliminary results next week, could we have a refresher on NIO's overseas footprint, particularly in Europe and the Middle East?

Thank you for the question. The entire industry is awaiting the preliminary announcement regarding the anti-subsidy investigation in Europe. We believe that implementing tariffs on new energy vehicles goes against the global sustainable development initiative. We will modify our strategies according to any new tariff developments. Currently, our sales in the European market are relatively small compared to our overall vehicle sales, and any immediate operational impact is limited. Looking ahead, we will continue to adapt our strategies for both NIO and ONVO as well as Firefly in response to changing policies. As for entering the Middle East market, we are preparing to launch our products and services in the UAE later this year.

Thank you.

Thank you. Your next question comes from Cheng Jing from CICC. Please go ahead.

Hi. Thank you for taking my questions. My first question is a quick follow-up regarding financial impacts, particularly concerning the major, fast policy adjustments in the first quarter, such as the battery rental fee adjustment and battery swap coupon. Could you share the financial impact, especially related to our income statement?

Regarding price adjustments, there are two parts to consider. Firstly, the price reduction from 180 to 728 has not had a material impact on NIO’s revenue or gross profit margin. We made this adjustment based on the assumption that the battery can be used for a longer time due to optimizations in battery operations. For the promotions we offered—such as granting users a month for free—over five years, the financial impact of this promotion is typically below RMB6,000 per car.

Thank you. My second question addresses ONVO and Firefly. With ONVO’s first car and Firefly launching this year, we will have a comprehensive product matrix in the next year. Could you share further details about the different positions and relationships among these three brands, as well as potential collaboration aspects?

Thank you for the question. The positioning of our three different brands is clearly defined. NIO is a premium brand targeting business users and the business community, while also appealing to family-oriented users. ONVO targets the premium family market, which is a mass market segment. Firefly, as I mentioned, will be an affordable boutique compact car in China, primarily aimed at family-oriented users looking for a second vehicle. In terms of prices, there's a clear differentiation between these brands, with starting prices around RMB100,000, RMB200,000, and RMB300,000 respectively. However, all three brands share a common feature: power swap capability. Additionally, they share fundamental smart technologies, electrification capabilities, and vehicle engineering competencies, allowing them to leverage synergies in software and hardware. Regarding power swap stations, NIO and ONVO will have similar ownership structures. The initial model of ONVO L60 will be built in NIO’s second factory, NIO F2. Overall, we can capitalize on these synergies and share investments across the three brands.

Thank you. Your next question comes from Tina Hou from Goldman Sachs. Please go ahead.

Thank you for taking my questions. My first question is regarding your prior comments about sustaining steady volume increases while improving gross margin. Can we interpret this as expecting vehicle volumes to exceed 20,000 units per month in the upcoming months? That's my first question.

We do observe steady demand for our products. In May, the order demand exceeded our production capacity. The actual deliveries we recorded in May essentially reflect the highest number of vehicles we could produce for that month. Therefore, we are confident in sustaining steady growth momentum.

Thank you for your answer. Just a quick follow-up: Regarding the ONVO deliveries starting in September, does the forecast of 20,000 units include ONVO's expected volume or is that specific to NIO?

After the launch of the ONVO brand, we expect positive effects on NIO product sales. The demand for NIO products is expected to remain stable despite the introduction of ONVO. We are also training our operators and frontline teams to ensure readiness for ONVO production. Additionally, we may implement dual shifts on certain production lines to accommodate the needs of both brands. The mentioned figure of 20,000 units pertains specifically to NIO's brand sales.

Thank you for the clarity. Regarding the operating expenses, beginning with SG&A, we noted a 22% year-over-year increase in Q1. Should we expect similar year-over-year growth in the subsequent three quarters? And with the addition of 100 new stores for ONVO starting in September, should we expect SG&A expenses to rise further in the last quarter? Additionally, regarding R&D, which saw a 7% decrease year-over-year, what annual spending level do you consider sustainable to remain competitive in hardware and software technology? Thank you.

Regarding operating expenses, especially in Q1, marketing activities decreased due to the impact of the Chinese New Year Festival and seasonal changes. Starting in Q2, we expect the percentage of selling expenses against vehicle revenues to improve if our sales growth can proceed as planned. With ONVO's launch, we believe sales growth will not negatively affect efficiency since increasing ONVO's volume should lead to higher overall sales revenue. Concerning R&D expenses, fluctuation in Q1 aligns with our R&D activity pace, particularly for new vehicle models and core technology development. In 2024, we project R&D expenditures to be consistent with those from 2023, approximately RMB3 billion per quarter—a forecast aligned with previous statements. Thank you, Tina.

Yes, I realize the percentage of SG&A to revenue will decline. But in terms of year-over-year growth, can we expect it to be more than 22% this year?

Based on our current forecast, we don't expect SG&A growth to exceed 20% in 2024.

Okay. That's very clear. Thank you.

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

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