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

Thank you. Good morning and good evening, everyone. Welcome to NIO's Second Quarter 2024 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and posted on the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board, and Chief Executive Officer; and Ms. Stanley Qu, Chief Financial Officer. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the US 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 US Securities Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO's press release which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

Hello, everyone. Thank you for joining NIO’s 2024 Q2 earnings call. In the first half of this year, the NIO brand completed the 2024 model year facelifts, further enhancing the competitiveness of its NT2 products. In the meantime, as NIO's technologies, products, services, and the user community were recognized by more people, its order intake and delivery continued to grow. NIO’s delivery in Q2 reached a quarterly record of 57,373 units, up 143.9%. In China, NIO model had over 40% market share among all BEVs with a transaction price higher than RMB300,000. Since Q3, NIO's product mix has been continuously optimized. In July and August, the delivery was 20,498 and 20,176 respectively. With that, NIO's monthly delivery had been more than 200,000 for four consecutive months. The total delivery in Q3 is expected to be between 61,000 and 63,000 units. In terms of NIO's financial performance, with continuous cost optimization of core components and supply chain, the vehicle margin in Q2 increased to 12.2%. As the user community became larger and more vibrant, the second quarter also witnessed rapid growth in revenues from after-sales and power services. The gross margin of other sales continued to improve. Now, I would like to share with you the recent highlights of our product, R&D and Operations. On July 27, NIO hosted Nio IN 2024, at the event we introduced the full-domain operating system, SkyOS, and the smart system, Banyan 3. Moreover, we also announced the successful tape-out of Shenji NX9031, our in-house developed chip for smart driving. As for NAD, NIO continued to integrate its capabilities. In July, the industry's first AEB function based on end-to-end architecture was released. With the scenario coverage 6.7 times better than traditional AEB, it makes driving safer. At Nio IN, we also introduced the NIO owned model, NWM, the branding new architecture for smart driving. NAD Arch 2.0 was also released. This is the most advanced end-to-end architecture based on NWM. New features and experiences of NAD Arch 2.0 will be released in the second half of this year. On September 19, our family-centric mass-market brand ONVO is going to celebrate the launch of its first model, L60. User delivery will start in late September. With strong confidence in this all-round product, we will spare no effort in ramping up production and fulfilling market demand. For sales and services, as of now, the NIO brand has 161 NIO Houses and 408 NIO Spaces, as well as 351 service centers and 63 delivery centers. The ONVO brand has already opened 105 stores in 55 cities and we have over 200 stores planned for the end of the year. By the year-end, we have over 2,561 power swap stations worldwide and have provided over 52 million swaps. In addition, NIO has installed over 23,000 power chargers and destination chargers. Quick and hassle-free recharging is critical for convincing ICE owners to drive BEVs. On August 20, we hosted the Nio Power Up event, where we announced the plan for Power Up counties. In the first half of 2025, NIO's charging network will become available in every county in mainland China. By the end of 2025, the swapping network will become available in more than 2,300 counties in China. To better support this initiative, we also announced the Power Up Partner Plan and signed agreements with partners. The continuous deployment of the charging and swapping network will help expand the market reach of NIO and ONVO and further drive sales growth. As for market development, we are accelerating the international expansion; on August 20th, NIO’s UAE Website went live, and in Q4, the products will be launched and delivered in UAE. While ensuring controllable investment and efficient operations, we will also actively evaluate opportunities worldwide, introducing products to more markets. In the NEV quality study released by JD Power in early June, NIO models ranked the highest in their respective segments. NIO is also the only NEV company winning top ranking for six consecutive years. Ever since its establishment, NIO has been committed to becoming a global benchmark of quality and providing great user experience through lifecycle quality management. As NIO has been funded for almost 10 years with the multi-brand strategy and the international business roadmap as well as the external change, we upgraded the company's value system in July. In the quest of Blue Sky Coming, NIO aspires to shape a sustainable and bright future and envisions itself as a user enterprise where innovative technology meets experienced excellence. With new brands and products being launched step by step, the fundamental tech capability and the long-term strategic planning that NIO has been developing will have a greater effect. NIO's cumulative R&D investment, sophisticated community operations, and efficient infrastructure deployment will lead to better sales and margin. We look forward to NIO's performance in the second half. Thank you for your support. With that, I will now turn the call over to Stanley for Q2's financial details. Over to you, Stanley.

Thank you, William. Now let me go over our key financial results for the second quarter of 2024. I will refer to RMB only in my discussion today unless otherwise stated. Our total revenues were RMB17.4 billion, up 98.9% year-over-year and up 76.1% quarter-over-quarter. Revenues from vehicle sales were RMB15.7 billion, representing an increase of 118.2% year-over-year and an increase of 87.1% quarter-over-quarter. The increase year-over-year was mainly attributed to higher deliveries partially offset by a lower average selling price due to changes in product mix and user rights adjustments since June 2023. The increase quarter-over-quarter was mainly attributed to higher deliveries. Other sales were RMB1.8 billion, representing an increase of 11.3% year-over-year and an increase of 15.6% quarter-over-quarter. The year-over-year increase was mainly due to the increase in sales of parts, accessories, and after-sales vehicle services, and provision of power solutions, which both grow with our user base and were partially offset by lower sales of used cars. The increase quarter-over-quarter was mainly attributed to the increase in sales of parts, accessories, and after-sales vehicle services, provision of power solutions, and other products, as well as the increased revenues from technical R&D services. Vehicle margin was 12.2% in this quarter compared with 6.2% for the same period of 2023 and 9.2% for the last quarter. The year-over-year increase was mainly due to the decreased material cost and was partially offset by a lower average selling price. The quarter-over-quarter increase was mainly due to decreased material costs. Overall gross margin was 9.7%, compared with 1% in the same period of last year and 4.9% in the last quarter. R&D expenses were RMB3.2 billion, decreased 3.8% year-over-year, and increased 12.4% quarter-over-quarter. The quarter-over-quarter increase was mainly due to the incremental design and development costs and the increased personnel costs in R&D functions. SG&A expenses were RMB3.8 billion, increased 31.5% year-over-year, and increased 25.4% quarter-over-quarter, which was mainly driven by higher personnel costs related to sales functions and increased sales and marketing activities. Loss from operations was RMB5.2 billion, representing a decrease of 14.2% year-over-year and a decrease of 3.4% quarter-over-quarter. Net loss was RMB5 billion, representing a decrease of 16.7% year-over-year and a decrease of 2.7% quarter-over-quarter. As of June 30, 2024, our company had cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits in total of RMB41.6 billion. For more information and details of our unaudited second quarter 2024 financial results, please refer to our earnings press release. Now this concludes our prepared remarks. I will turn the call over to the operator to facilitate our Q&A session. Thank you.

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

Hi, management team. Thanks for taking my question. I have two questions. The first question is about our new model L60 because L60 started pre-sale in mid-May. Since then, I think the model has received tens of thousands of pre-orders, which is very robust compared to all the new launches lately. But how could NIO also ensure a high conversion rate this time after the official launch on September 19? Will the company consider getting more aggressive with the official pricing given the competition? And in the meantime, what kind of supply chain preparation has the team done to avoid any potential supply disruption after the release starts? That's my first question. Thank you.

Thank you, Tim. On August 15th, we witnessed the offline of the very first mass-produced L60. The head of sales of the ONVO brand is actually driving this very first mass-produced car, having a road trip in China. He has been driving the car for almost 20 days while broadcasting on social media. It has received a lot of attention from the public, with several million daily views of the broadcast. In terms of the pre-order intake, it has surpassed our expectations, so we are quite confident about the overall competitiveness of this project. Regarding the pricing strategy, we announced a pre-sale price of about RMB290,900, which is around RMB30,000 cheaper than Model Y. Before the official launch of the project on September 19, we still have some time and room for final price adjustments. Overall speaking, we will strive to strike a balance between the vehicle margin and the price point to find the sweet spot. We will not be very aggressive as we need to realize a reasonable margin for the project. Regarding the supply chain security, our target is to have a supply capacity of 10,000 units by the end of this year, and by sometime next year, we will aim for a supply capacity of 20,000 units per month. Next question?

Sure. Thank you, William, for sharing the details. My second question is about the NIO brands, the vehicles on the NIO brand because we noticed the monthly sales of models on the NIO brand have stabilized at 20,000 levels in the second quarter. So looking forward, would there be any further upside to vehicle sales and gross profit margin based on the current product portfolio? If yes, please share with us where would the upside to the volume and margin of NIO branded vehicles be coming from? That's my second question. Thank you.

Tim, this is Stanley. Thank you for your question. Regarding the vehicle margin of the NIO brand, in the second quarter, we achieved a vehicle margin of 12.2%. That is mainly due to the efficiency improvements on the supply side and in production. As in the past four months, we have realized a monthly delivery volume of more than 20,000 units. We also see opportunities for further improvements, including the cost optimization of the product, as well as to improve the high-margin products in the product mix from the marketing side. We will keep improving the vehicle margin in the following two quarters and expect to achieve a vehicle margin of around 15% by the end of the year. We also see opportunities to improve our delivery volumes month-over-month, but we also need to strike a balance between the vehicle delivery volume and the vehicle margin. Both will increase, but not drastically for either margin or the vehicle volume. Overall, our long-term operational target is to realize a monthly volume of 40,000 units and a vehicle margin of 25%. The ONVO brand faces a larger market with a total car park of more than 8 million. Utilising our Battery-as-a-Service and a well-established charging and swapping network, we believe that ONVO's products will be competitive against PHEV, RAV, and other BEV models.

Thank you very much. Great understanding. Thanks for all the insights, and looking forward to the L60 launch. Thank you.

Thank you.

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

Okay. Thank you so much. My first question is also about the ONVO L60. Previously, you mentioned that this year, your volume target is about 20,000 units. Given the strong order, do you still maintain such a volume target? And could you break that down by month, because we are not exactly at the end of the month, so what is the progress for October, November, and December? That is my first question. And the second question is about the expense. SG&A expense. It seems like expenses keep increasing. What's your target for this quarterly expense? Do you have guidance for each quarter in the upcoming second half? Thank you.

Regarding the ONVO L60, we will start the delivery of the products from late September, but it will take some time for us to ramp up the production and supply of the new product. Thus, most of our deliveries this year will occur in Q4. We will begin delivery from September, but not in significant volume. Toward the end of the year, we hope that our monthly delivery will be around 10,000 units for December. In terms of the supply side, the car is equipped with many new technologies, so it will take some time for the supply side to ramp up their production. Thank you.

This is Stanley. Regarding expenses, there are two categories. The first is R&D expenses. We will maintain a similar R&D investment pace and intensity on a quarterly basis. So roughly on a non-GAAP basis, it will be around RMB3 billion every quarter, but there will be fluctuations or slight differences quarter-to-quarter relevant to our actual R&D activities. For the SG&A expenses, as mentioned, we will see increases in our expenses as we ramp up the delivery volume of L60. However, we also think we will keep optimizing the percentage of the SG&A expenses against the overall sales revenue from L60.

Thank you.

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

Thanks for taking my question. My first question is also regarding the ONVO L60. Just wondering, at 10,000 volume in December this year and 20,000 volume next year, what kind of gross margin should be reasonable for this model? Also, as we ramp up to higher volumes, what is our capacity expansion and CapEx plan for 2025 and maybe 2026? Should we expect CapEx to become higher compared to 2024? That's my first question. The second question is also regarding the sales and marketing expense. We had over 30% SG&A expense growth in the second quarter. Could you provide more details on the sub-items, which is growing the fastest? And also, is any of the sales policy recorded in the SG&A expense? Yes, so that's my second question. Thanks.

Regarding L60, when its overall production volume reaches its expected targets, we believe it will naturally achieve a vehicle margin of 15%. Of course, against fierce competition, we have reserved some room for variable marketing of the product so that we can be more flexible in competing. Overall speaking, as the product is designed for efficiency and cost, a 15% vehicle margin is a reasonable target for this model, as we manage a balance between technology advancement and cost competitiveness. Regarding capacity preparation, we have mid- to long-term planning for our production capacity in 2025 and 2026. As of now, we already have two factories operational; F2 has started to upgrade to double shifts to support L60 production. By late September or early October, the upgrade will be completed. We are also planning our third factory, which will be ready around Q3 next year. This will ensure we will not face production capacity bottlenecks for the long term. Here in China, the production capacity and capabilities for vehicles and parts are quite competent. Some companies may face short-term disturbances in their capacity and supply, but that won’t be a long-term issue for us. We obtained independent manufacturing qualifications last year, laying the foundation for long-term stable capacity.

This is Stanley. Regarding CapEx, we are making prudent controls and management of the pace of our investments and expenses. Starting last year, we have already begun managing this by postponing certain projects or even canceling some projects. Overall speaking, CapEx in 2024 will be significantly lower than that in 2023. As for 2025, we haven't started the budget process yet, so we don't have a clear picture, but we believe that overall expense intensity will be similar to this year. The increase in SG&A expenses in Q2 was mainly driven by two reasons: first, in Q1, we delivered around 30,000 units, while in Q2, we delivered more than 57,000 units. The increase in sales volume naturally drove up staff costs, as the team size has grown and incentives for the sales force have increased. The second reason is that in the first half of this year, we launched our model, and many of the NIO products were launched around March and April. We initiated a series of communications and marketing campaigns for these products that increased our development expenses from Q1.

Can I have a very quick follow-up? So in terms of ONVO stores, do you have the average store rental cost versus a NIO store? And also, how many employees do you plan to deploy in an ONVO store versus that of a NIO store? Thank you.

Regarding the opening of ONVO stores, we actually require the team to open stores quickly and efficiently. In terms of CapEx, as well as the rental of a single ONVO store, it is significantly lower than that of a NIO store. However, we don’t have specific numbers for comparison, as actual expenses may differ by location and store type. Overall, it is significantly lower than NIO. For the existing 100 ONVO stores we have opened, the renovation cost for each store was no more than RMB1 million. For the following 100 stores we plan to open by the end of the year, we will have even stricter renovation cost requirements, allowing us to utilize existing resources efficiently.

Thank you, Tina.

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

Thank you, team. Yuqian here. I've got two questions. First is about autonomous driving progress and second is about market and competition dynamics. First question, could you share the NIO NOP progress? Especially could you break this down in terms of the consumer take rate, our disengagement rate, scenario coverage, and regional expansion? The second question is to ask against the backdrop of the premium EV segment, with several new models coming, especially in the coming months until the end of the year. We noticed consumer consumption is sliding in high-tier cities compared to low-tier cities. Could you help us to understand how NIO and ONVO's product technology and service expansions could counter these macro headwinds and still yield growth quarter-on-quarter?

Thank you for your question. We also noticed the fierce competition in the area of smart driving, yet we are confident that NIO is among the top players in this field. NOP Plus is now used by more than 300,000 users, as it is now a standard feature on our NT 2.0 project. The cumulative knowledge driven with NOP and NOP Plus has surpassed 1.1 billion kilometers. Thus, in terms of user base and total mileage driven with the functionality, we are a leading player in China. Regarding the technology roadmap, many players are converging their technology solutions into end-to-end models, including Tesla and other players in China. NIO is also working on its end-to-end model, having released our first feature based on end-to-end architecture: end-to-end AEB. Its performance is significantly improved compared to traditional AEB functionality, covering 6.7 times more scenarios. We have also released NAD Arch 2.0 based on the NIO work model, enhancing quick functionality iterations and better experience at a lower cost. The ONVO brand will feature a single range with pure vision technology, and we have witnessed strong performance in urban driving scenarios. Overall, we believe that the smart driving functionalities will improve safety for users. Regarding the competitive landscape, the NIO brand has maintained a stable market share in the premium segment for years due to our diversified product portfolio. Our vehicles cover several segments. Overall, we have a successful product portfolio and strategy in place to adapt to market changes.

Awesome. Thank you.

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

Hi, William. Thanks for taking my questions. Two questions here. The first one is regarding the flagship sedan, ET9. I think it was announced to launch in Q1 next year. Is that still on schedule? Can you provide updates on this model regarding new technology adoption and volume outlook? The second question is regarding overseas expansion. You are going to open a store in UAE and start delivering there. Is this a signal of change in strategy because of the EU tariff? Are you shifting direction from Europe to the Middle East? One of your peers has been delivering over 10% of their volume into overseas markets. Do you see that as a benchmark for your overseas expansion over the next one or two years?

Thank you for the question. Regarding the ET9, we are still proceeding according to the launch preparation plan, and we haven't made any changes to the schedule for this product. The ET9 is equipped with many new technologies, including steer-by-wire, fully active suspension, in-house developed chip, as well as SkyOS, so we are dedicated to ensuring its successful launch next year. Regarding our international expansion, we haven't changed our direction. The tariffs in Europe have made exporting costs more expensive, so we will focus on the five European markets we have already entered. Establishing NIO as a premium brand in the European market takes time, and we are patient. We opened our NIO house in Amsterdam earlier this year and are still deploying power swap stations there. The market entry into the UAE is part of our strategic plan since receiving a $3 billion investment from the Abu Dhabi government. Starting next year, we will actively offer our products and services to that market, with products from both NIO and ONVO, which are suitable for the global market. We will continue to be active in international expansion but maintain balance between our investment scale and operational efficiency.

Thank you. That’s excellent.

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

William and Stanley, I also have two questions. My first question relates to the overall macro situation. What do you think is the potential growth rate for the China EV market over the next few years? Some investors expect that EV penetration might decline as it is already high. Please share your view on this. Secondly, regarding the Firefly pipeline, will you launch one or two models in 2025?

Thank you for your question. In the first half of this year, the overall passenger vehicle market increased by around 3.6%. For the longer term, if you look at the total BEV population in China, it is as big as 20 million to 30 million units, already significant. Consequently, it will keep growing, but probably not at a very high rate. It’s normal for the BEV market to experience a slight decrease, but even so, China will remain the largest passenger vehicle market globally. The new energy vehicle penetration rate has surpassed 50%, and I believe it will continue to increase, and at a faster pace as the ICE costs transition toward BEVs. We can take Norway as a reference; they quickly increased from 50% to 80-90% penetration rates. I expect that in 2-3 years, the penetration rate of new energy vehicles among new vehicle sales will surpass 80%. Regarding ICE cars in China, they’ve entered a vicious cycle of having to cut prices to maintain market share, which negatively impacts their profit margins and brand image. As a result, we’re witnessing the decline of market shares for brands like Hyundai, Kia, Ford, GM, and even Japanese brands like Toyota and Honda. Overall, I believe that the penetration rate for new energy vehicles will grow rapidly. Regarding Firefly, we plan to deliver products from 2025 and are smoothly progressing with our product preparation. Thank you, Ming.

Thank you. Your next question comes from Chang Xing from CICC. Please go ahead.

Okay. Thank you for taking my questions. I have two questions. The first is about our NIO operating system, SkyOS, that was released in July. It has shown impressive software self-development capabilities. Can you share more details about the technical challenges we faced and advantages gained, as well as the improvements to our product brought by the new system? My second question is regarding other income, as we have seen the gross profit margin improve significantly in the second quarter. What are the major drivers of this improvement? What are our forecasts for future margin trends? Given the growth in sales volume, can we expect our charging and battery swap business to turn a profit in the future?

Regarding SkyOS, it's the world's first full-domain vehicle operating system. This uniqueness also presents challenges when developing SkyOS, as fragmented operating systems are insufficient to manage the electric architecture of modern vehicles. Thus, we developed SkyOS with three levels: SkyOS-H (the hypervisor) at the bottom, four kernels in the middle, and SkyOS middleware at the top. It's very comprehensive, developed over four years with 20,000 lines of code. Benefits of SkyOS include enhanced safety and security, stable system performance, and efficient R&D processes. This helps address problems faced by smart electric vehicles, such as huge data throughput, domain cost fusion, and communication latency. We are thrilled to have made this happen. Additionally, SkyOS will be applied to our brands, including NIO, ONVO, and Firefly. It serves as a cornerstone for our future products and development. Regarding revenues and losses, we’ve significantly narrowed losses in Q2, primarily because of two reasons. First, we improved the profitability and efficiency of our aftermarket services after releasing our 2024 service policy in February, making the services efficient and profitable. Secondly, we decoupled the lifetime free power swap from vehicle sales, leading to more users, especially new ones, paying for power swap services and subsequently improving our revenues and margins. We believe that as we grow our user base and sales, especially with ONVO product launches, profitability will improve further, and we aim for breakeven or profit from this segment. Regarding power swap stations or the power swap service, a single station can reach breakeven if it performs over 60 swaps per day. Currently, we have over 2,500 power swap stations with each averaging 30-40 swaps per day. From 30-40 to 60 swaps is not far for us, but we are currently suffering losses due to early adopters receiving lifetime free swaps, increasing operating costs. We are also proactively installing swap stations, which brings some short-term losses due to their advance deployment.

Thank you. Very clear.

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